Oil prices today are rising as the market is getting increasingly confident that demand is reaching the end of the recovery tunnel, with strong usage indications coming globally, from the U.S. to China.
Doubling the demand enthusiasm, today’s OPEC+ meeting is expected to leave the group’s policy unchanged, leaving the supply comeback plan unchanged through July.
The expectation for the OPEC+ meeting today is in fact an anti-expectation. Traders are bullish as they assume the group will make no tweaks to its plan to slowly and gradually bring supply back to the market through July.
Any doubts about the current plan and plans for future supply policy will likely be addressed at the next meeting on June 24 to get a better pulse on the Iran nuclear negotiations and upstream implications, to make a better-educated call.
Since May 2020 and the monster OPEC+ cuts, the market has been usually bullish leading up to and on the day of OPEC+ meetings.
The prevailing market assumption has been that the oil-producing countries will remain diligent and generous and prevent the market from being vastly over-supplied.
This is the enthusiasm that has sent Brent front-month futures above $70 per barrel this morning, exactly on par with Rystad Energy’s call for $70 per barrel Brent this summer.
The participating members of the OPEC+ deal (excluding Iran, Venezuela, Libya, and Mexico) plan to pump about 36.2 million bpd of crude oil for July 2021, a more than 2 million bpd increase since the decision was taken back in April 2021, when the group was targeting production of 34.1 million bpd.
Looking back at demand, the market is shrugging off the downside risk spreading across Asia. While the more than 1 million bpd demand dent in India is likely already priced in, the wave of new restrictions in Japan, Indonesia, Thailand, and Vietnam may not yet be fully appreciated in terms of oil consumption losses.
Gasoline demand in the U.S. is increasing as we enter the summer season and also Chinese factory activity had a very strong May, both cementing trader enthusiasm and helping prices grow.
Overall, there is a strong consensus that oil demand is on the mend, but there is a variety of interpretations of just how fast and sustained the upward curvature will be.
Rystad Energy still maintains guarded skepticism compared to other market forecasters, as the rapid distribution of vaccines and subsequent boosters will still not bring herd immunity to many countries, especially in the developing world, until the end of 2021.
This means there may be a need for more lockdowns and more oil demand destruction along the way.
Unless new lockdowns are imposed or extended, we see oil demand recovering during the second part of the year, mainly boosted by the structural growth of road transport and petrochemicals.
Despite this steady recovery, the growth rate of oil demand, won’t be strong enough to allow a full recovery to pre-virus levels. We will need to wait until 2022 to see demand fluctuating around 2019 levels.
Rystad Energy expects total liquids products demand to average 94.5 million bpd in 2021, lower than the OPEC research division estimate of 96.4 million bpd.
Louise Dickson is an oil markets analyst for Rystad Energy.