Can Oil Sustain Its Rally as U.S. Demand and a Weaker Dollar Drive Momentum?

Oil prices surged on Thursday, with Brent crude rising 1.7% to $68.83 a barrel and U.S. West Texas Intermediate jumping 2% to $66.24. The rally followed a sharp draw in U.S. crude inventories, which fell by 5.8 million barrels last week, according to the Energy Information Administration, far exceeding analyst expectations.

This inventory drop, coupled with increased refining activity and the onset of the summer driving season, has reignited optimism about American fuel demand.

Analysts at ANZ noted that the U.S. driving season, initially sluggish, is now gaining traction and stoking demand. Market participants are increasingly focused on these fundamentals, shifting away from recent geopolitical anxieties.

Will Tight Inventories and Seasonal Trends Support Further Gains

The current inventory levels are at decade lows for this time of year, intensifying concerns about supply tightness. Phil Flynn from the Price Futures Group highlighted that the market is grappling with the sudden tightness of crude oil inventories. As the summer progresses and travel increases, the risk of further draws could keep upward pressure on prices.

However, the sustainability of the rally will depend on whether demand remains robust and if refiners can keep pace without significant disruptions. Any unexpected supply shocks or refinery outages could quickly amplify price volatility.

Did you know?
U.S. crude oil inventories are now at their lowest seasonal levels in over a decade, a key factor driving recent price gains and heightening sensitivity to any supply disruptions.

Weaker Dollar Boosts Oil’s Appeal for Global Buyers

The U.S. dollar index sank to a three-year low on Thursday, making oil cheaper for holders of other currencies and boosting international demand. The dollar’s decline was fueled by fresh bets on U.S. interest rate cuts, following speculation that President Trump may soon announce a new Federal Reserve chair.

As the greenback weakens, commodities like oil become more attractive to global investors, further supporting the rally.

This currency dynamic is especially significant in the current environment, where macroeconomic policy shifts can quickly alter the balance of supply and demand in energy markets.

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Geopolitical Risks Remain, but Market Focus Shifts to Fundamentals

While the recent ceasefire between Iran and Israel has eased some geopolitical tensions, the market remains alert to potential disruptions. President Trump’s comments about maintaining pressure on Iran, coupled with signals of possible easing in oil sanctions, add a layer of uncertainty.

Citi analysts noted that Trump’s sensitivity to high oil prices could limit the geopolitical risk premium, even as the conflict’s resolution remains fragile.

For now, traders are prioritizing inventory data, demand signals, and currency movements over geopolitical headlines, but any flare-up could quickly shift sentiment.

Outlook Hinges on Demand Resilience and Policy Developments

The path forward for oil prices will be shaped by the interplay of demand resilience, inventory trends, and policy decisions from both OPEC+ and the U.S. administration. With the driving season in full swing and the dollar under pressure, the stage is set for continued volatility.

Market participants will be watching closely for signs of sustained demand, further draws in inventories, and any shifts in U.S. or global energy policy.

If these factors align, oil could extend its rally through the summer. However, any disappointment on the demand side or a reversal in currency trends could quickly cap gains.