OPEC+ left oil consumers in limbo, sticking to its plan of monthly production increases until July but refusing to give any hints about further moves until there’s clear evidence more crude is needed.
“The demand picture has shown clear signs of improvement,” Saudi Energy Minister Prince Abdulaziz bin Salman said, in some of his most upbeat comments since the price crash last year. But pressed on whether more supply increases will be needed, he said: “I will believe it when I see it.”
The wait-and-see approach indicates that OPEC+ is likely to err on the side of caution, potentially responding too late if the energy market tightens rapidly, as OPEC itself is forecasting. The risk for the broader economy is faster inflation just as it’s recovering from the pandemic.
Hours before oil producers gathered virtually, the International Energy Agency warned of a looming gap between rising demand and stagnant supply in the second half of the year, putting upward pressure on prices.
“Demand growth is outpacing supply gains even with the agreed month-by-month OPEC+ production increases taken into account,” said Ann-Louise Hittle, oil analyst at consultant Wood Mackenzie Ltd.
The IEA, which advises Western countries on energy policy, forecast that global oil demand will jump roughly 5 million barrels a day — the equivalent of the production of Kuwait and the United Arab Emirates — between now and the end of the year.
With Brent crude rising above $70 a barrel on Tuesday, OPEC+ is now at the center of one of the most pressing debates in global markets: the threat of inflation. From the U.S. Federal Reserve to the People’s Bank of China, central bankers are starting to sweat about rising prices, particularly for commodities such as steel and lumber that later filter into the cost of everyday goods. Prince Abdulaziz said that Saudi Arabia, Russia and other oil producers weren’t to blame, with oil having a “minuscule” impact.
And yet, Western consumers are feeling the pinch. In America, average retail gasoline prices rose to a six-year high above $3 per gallon over the Memorial Day weekend, which traditionally marks the start of the summer driving season.
“This inflation issue is not going away,” said Bill Farren-Price, a director at research firm Enverus and veteran observer of the cartel. “If OPEC+ are smart they will start to worry about the risk of demand being eroded as oil gets into the $70s.”
For Prince Abdulaziz, the concern about inflation marks a welcome turn-around for the oil market, however. The veteran Saudi minister has spent the year leading an often unruly coalition of oil producing nations that cut production significantly and only recently has started to boost output in response to higher demand and rising prices. Rather than high oil prices, OPEC+ has been battling with ultra-low ones for most of 2020 and early 2021. At one point last year, West Texas Intermediate traded in negative territory, with producers having to pay consumers.
The experience of the last year has left deep scars within the coalition. And Saudi Arabia has reason to be cautious about the second half, with the outlook dependent on two hard-to-predict factors: the coronavirus and nuclear talks between Tehran and Washington.
While oil demand is improving in the Americas and Europe, the opposite is happening in Asia as the spread of new variants prompts lockdowns from India to Japan, Vietnam and Malaysia.
“Covid-19 is a persistent and unpredictable foe, and vicious mutations remain a threat,” OPEC Secretary-General Mohammad Barkindo said.
The nuclear talks, which diplomats initially said were aiming for a deal by June, appear more complicated than anticipated. Iran and the U.S. will probably need more time to iron out their differences, with a deal potentially delayed until August.
“They’re going to wait and see what happens with Iran. If Iran does get delayed and if demand picks up as we expect, then OPEC will need to bring barrels back,” said Amrita Sen, chief oil analyst at consultant Energy Aspects.
Prince Abdulaziz is probably also waiting for the market to digest all the new oil that Saudi Arabia and the rest of the OPEC+ is adding. In May, the cartel added 600,000 barrels a day extra. This month it will increase another 700,000 barrels a day, and in July nearly 850,000 barrels more. The impact will only be felt later this summer.
But the wait-and-see approach presents a problem for consumers: refiners unsure of OPEC’s next moves may rush into the spot market before prices rise further. And as prices go higher, others refiners will do the same, creating a spiral. There are signs investors are already expecting that to happen.
Crude Oil Rises to $72 a Barrel on Strong Demand Recovery
Oil prices rose on Friday to fresh multi-year highs and were set for their third weekly jump on expectations of a recovery in fuel demand in the United States, Europe and China as rising vaccination rates lead to an easing of pandemic curbs.
Brent crude futures edged up 13 cents to $72.65 a barrel to 1145 GMT, a day after closing at their highest since May 2019.
U.S. West Texas Intermediate (WTI) crude futures were up 14 cents to $70.43 a barrel, a day after their highest close since October 2018.
U.S. investment bank Goldman Sachs expects Brent crude prices to reach $80 per barrel this summer as vaccination rollouts boost global economic activity.
The International Energy Agency said in its monthly report that OPEC+ oil producers would need to boost output to meet demand set to recover to pre-pandemic levels by the end of 2022.
“OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” the Paris-based energy watchdog said.
It said that rising demand and countries’ short-term policies were at odds with the IEA’s call to end new oil, gas and coal funding.
“In 2022 there is scope for the 24-member OPEC+ group, led by Saudi Arabia and Russia, to ramp up crude supply by 1.4 million barrels per day (bpd) above its July 2021-March 2022 target,” the IEA said.
Data showing road traffic returning to pre-COVID-19 levels in North America and most of Europe was encouraging, ANZ Research analysts said in a note.
“Even the jet fuel market is showing signs of improvement, with flights in Europe rising 17% over the past two weeks, according to Eurocontrol,” ANZ analysts said.
Crude Oil Rebounds on Thursday After Slipping on U.S Weak Demand
Oil prices rose on Thursday a day after slipping on data indicating weak U.S. driving season fuel demand as investors eyed upcoming U.S. economic data.
Brent crude oil futures were up 18 cents, or 0.25%, at $72.40 a barrel, holding just shy of a high not seen since May 2019.
U.S. West Texas Intermediate oil futures rose 11 cents, or 0.16%, to $70.07 a barrel, staying near its highest since Oct. 2018.
“The market is recovering impressively from yesterday’s dismal weekly EIA report, the drop in weekly gasoline demand was particularly disappointing,” said Tamas Varga, analyst at PVM Oil Associates.
“It will interesting to see whether the monthly OPEC report due out later will confirm last month’s upbeat demand assessment for the second half the year. If it does, as expected, it should support oil prices.”
Varga added that U.S. inflation data and jobless claims would provide more direction on the health of world’s biggest economy and clues as to whether the Federal Reserve might start tapering stimulus.
U.S. crude oil stockpiles that include the Strategic Petroleum Reserve (SPR) fell for the 11th straight week as refiners ramped up output, but fuel inventories grew sharply due to weak consumer demand, the Energy Information Administration (EIA) said on Wednesday.
Crude inventories that exclude the SPR fell by 5.2 million barrels in the week to June 4 to 474 million barrels, the third consecutive weekly drop. But fuel stocks were up sharply, with product supplied falling to 17.7 million barrels per day (bpd) versus 19.1 million the week before.
Implied gasoline demand fell to 8.48 million bpd in the week to June 4, down from 9.15 million bpd from the week before, but up from 7.9 million bpd a year ago, EIA data showed.
Weighing on prices, India’s fuel demand slumped in May to its lowest since August last year, with a second COVID-19 wave stalling mobility and muting economic activity in the world’s third largest oil consumer.
Oil Eases as Investors Await Iran Nuclear Talks this Week
Oil pulled back after hitting fresh multi-year highs on Monday, as investors awaited the outcome of this week’s talks between Iran and world powers over a nuclear deal that is expected to boost crude supplies.
Brent crude futures for August fell 37 cents, or 0.5%, to $71.53 a barrel, after earlier hitting $72.27, their highest since May 2019. U.S. West Texas Intermediate crude for July touched $70 for the first time since October 2018 but retreated to $69.32 a barrel, down 30 cents, or 0.4%.
Investors may have sold off some contracts to take profit when WTI hit $70, said Avtar Sandu, a senior commodities manager at Phillips Futures in Singapore.
“The primary concern is about Iranian barrels coming back into the market but I don’t think there will be a deal before the Iranian presidential election,” he added.
Both contracts have risen for the past two weeks as fuel demand is rebounding in the United States and Europe after governments loosened COVID-19 restrictions ahead of summer travel.
Global oil demand is expected to exceed supplies in the second half despite a gradual easing of supply cuts by OPEC+ producers, analysts say.
A slowdown in talks between Iran and global powers in reviving a 2015 nuclear deal and a drop in U.S. rig count also supported oil prices.
Iran and global powers will enter a fifth round of talks on June 10 in Vienna that could include Washington lifting economic sanctions on Iranian oil exports.
While the European Union envoy coordinating the negotiations had said he believed a deal would be struck at this week’s talks, other senior diplomats have said the most difficult decisions still lie ahead.
Analysts expect Iran, which is having its presidential election on June 18, to increase its production by 500,000 to 1 million barrels per day once sanctions are lifted.
In the United States, the number of oil and natural gas rigs operating fell for the first time in six weeks as growth in drilling slowed.
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