Oil prices rise, but the market still fears a supply shortage

XBR/USD

Key zone: 68.50 - 73.50

Buy: 74.50 (on strong positive fundamentals); target 76.50-78.50; StopLoss 73.80

Sell: 67.50 (on a decisive breakout of the 70.00–68.50 zone); target 65.50-63.50; StopLoss 68.20

OPEC+'s decision to increase its August production target by another 188,000 barrels per day did not trigger a significant market reaction. The reason is simple: traders understand that while oil supply is increasing on paper, the physical market remains hostage to geopolitical developments. Following the conflict around the Strait of Hormuz, exports from the Persian Gulf countries are recovering slowly, while logistical risks continue to support a geopolitical risk premium in oil prices.

In reality, the cartel is attempting to return part of the previously curtailed supply to the market. However, actual production and export volumes remain constrained by the consequences of the Middle East crisis. As a result, the increase in production quotas currently appears to be more of a political signal than a guarantee that additional barrels will actually reach the market.

Reminder:

In June, OPEC production increased by approximately 3.3 million barrels per day compared with May, reaching 19.43 million barrels per day. Exports from the Persian Gulf countries also rose by more than 3 million barrels per day, exceeding 10 million barrels per day, although they still remain roughly 40% below pre-war levels.

• OPEC+'s decision almost perfectly matched market expectations, which is why prices did not experience any sharp movement. The additional supply had already been priced in.
• The key issue today is no longer the size of the new production quotas, but whether producers can actually deliver the additional barrels. Even after the Strait of Hormuz reopened, shipping remains unstable, insurance costs remain elevated, and parts of the logistics network continue to operate under restrictions.
• Russia has become another important factor. Following damage to several refineries, Moscow has been forced to export more crude oil instead of refining it domestically, increasing supply on the global market.
• As a result, the oil market is receiving two conflicting signals simultaneously. On one hand, supply is gradually increasing. On the other, significant geopolitical risks remain and could once again disrupt supplies within just a few days.

Saudi Arabia's pricing policy has become a major focus of attention. In an effort to preserve its share of the Asian market, Riyadh has once again shifted toward price competition.

Saudi Aramco reduced the official price of its Arab Light crude for Asian buyers by $11, setting it at $1.50 below the regional benchmark. For the first time since the 2020 oil price war, the Kingdom's flagship export grade is being sold at a discount to the regional benchmark.

For European customers, the discounts proved even deeper, with prices for nearly all grades reduced by $15 per barrel, while shipments to the United States became approximately $8 per barrel cheaper.

This pricing strategy suggests that the world's largest oil exporter has already begun competing less for higher prices and more for customers. If the volume of freely available crude continues to grow, downward pressure on prices may intensify.

What does this mean?

The oil market has found itself caught between two powerful fundamental forces.

On one hand, OPEC+ is demonstrating its willingness to increase production, while the gradual recovery of shipments through the Strait of Hormuz is reducing the risk of a physical supply shortage.

On the other hand, investors fully understand that any new escalation involving the United States, Iran, or their allies could instantly push the market back into a supply deficit. That is precisely why the geopolitical risk premium has not disappeared from oil prices.

As long as Brent remains near $72 and WTI trades around $69, the market is effectively pricing in two opposite scenarios at the same time: a gradual normalization of supplies and a renewed escalation of the Middle East crisis.

For investors, this means continued high volatility. For oil companies, it means fiercer competition for market share. And for global stock markets, it means continued dependence on every new statement from Washington, Tehran, and OPEC+, because oil remains one of the world's primary indicators of geopolitical risk.

So we act wisely and avoid unnecessary risks.

Profits to y’all!