Brent: Surplus spooks the bulls

Goldman Sachs expects an oil market surplus of 3 million BPD in 2027.
Without Warsh’s help, Japan will be forced to resort to currency interventions.

Alexander Kuptsikevich FxPro

The Dollar is consolidating ahead of Kevin Warsh’s speech in Sintra, Portugal, and the release of key US labour market data. A hawkish surprise from the new Fed Chair at the June FOMC meeting sent financial markets into a tailspin, leading to a rise in Treasury yields and the greenback. If the central bank chief hints that he was misunderstood, everything will be turned on its head.

Meanwhile, the strengthening of the dollar has been one of the reasons behind the yen’s fall to 40-year lows and Brent’s rapid return to pre-Middle East conflict levels. In the spring, the rise in oil prices drove the dollar higher, but now the strengthening dollar is putting downward pressure on oil prices. That said, there are already plenty of headwinds for ‘black gold’.

Since the deal with the US was concluded, Iran has exported around 40 million barrels. Coupled with the rise in Russian oil supplies to 4.13M BPD, the highest since the beginning of 2022, this is exerting significant downward pressure on Brent.

Despite flare-ups in the conflict in the Middle East, tanker traffic through the Strait of Hormuz continues. The resumption of operations there allows Goldman Sachs to forecast a 3M BPD surplus in the oil market by 2027. Of this, 1 million BPD will be used to replenish strategic reserves. However, the remaining figure will be sufficient to give crude oil bears confidence.

The only thing likely to unsettle them would be the resumption of large-scale US air strikes against Iran. Donald Trump has not ruled out such action, but favours diplomacy.

Meanwhile, the USD/JPY has exceeded 162 for the first time since 1986. Investors are bracing for a resumption of currency interventions, on which Japan spent over $70 billion in April and May. According to Finance Minister Satsuki Katayama, the government and the central bank are ready to take appropriate measures regarding currencies at any time as necessary. The official noted that her US counterpart, Scott Bessent, had agreed with this.

If Kevin Warsh’s speech in Sintra fails to halt the US dollar’s advance, Japan will have no choice but to intervene in the forex market.

Summary: A strong dollar and rising supply are weighing on Brent; Japan is preparing to intervene amid a fall in the yen.

Author

Alexander Kuptsikevich

FxPro

Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.

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