The oil market is tightening and will continue to draw down inventories for the rest of the year. This drawdown is largely due to OPEC+ offering less supply than the expected demand growth in the coming months, analysts and industry professionals say. The OPEC+ group is expected to add 2 million barrels per day (bpd) between August and December. That is if the UAE-vs-all-others standoff on baseline production levels is resolved and a deal is sealed this week. Such a deal now looks unlikely as OPEC+ called off the meeting on Monday morning.
The proposed additional supply of 2 million bpd, in monthly installments of 400,000-bpd production increases, would be considerably less than the oil market would need as demand is bouncing back, according to many analysts.
The world’s biggest independent oil trader, Vitol Group, also believes that the global oil market will continue to tighten regardless of the fact that supply is likely to grow for the rest of 2021.
“I think there’s very little doubt that whatever lessening of the OPEC+ production cutbacks we see…it will be a fraction of the amount needed to meet growing demand in the second half of 2021,” Mike Muller, head of Vitol Asia, told a daily market webinar hosted by energy consultancy Gulf Intelligence on Sunday.
“If we end up with the numbers mooted last week, which was 400,000 bpd per month, August through the foreseeable next five months…we will still have a market which has an outlook for the spot months that will see more demand than supply,” Muller noted.
As a result, global oil stocks are set to continue drawing down because markets would need more crude oil than OPEC+ is planning to add for the rest of the year, he added.
A 400,000-bpd easing of the cuts each month until December would be supportive for oil prices, ING strategists Warren Patterson and Wenyu Yao said early on Monday.
For several weeks, indications and comments from the top oilmen in OPEC+ have been suggesting that the alliance would not ease production levels too much too soon, as they would likely want to see the market a bit tighter than what would be a balanced market.
The Saudi Energy Minister, Prince Abdulaziz bin Salman, has signaled continued caution within OPEC+ as he has been warning traders for months not to bet against oil.
“There will always be a good amount of supply to meet demand, but we’ll have to see demand before you see supply,” Abdulaziz bin Salman said at a forum in Russia in early June.
The demand rebound is already here, most evident in the United States.
According to GasBuddy data, U.S. gasoline demand on Friday before the July 4 weekend hit a new COVID high, surging by 9.3 percent from the previous Friday, the highest single day for demand since 2019. Moreover, U.S. gasoline demand on July 3 rose 1.9 percent from the prior Saturday, closing out the week (Sun-Sat) with weekly demand up 4.6 percent, the highest since August 2019, Patrick De Haan, head of petroleum analysis for GasBuddy, tweeted this weekend.
Expectations of demand roaring back keep many analysts bullish on the oil market, although a large part of them warn that OPEC+ will not let oil prices run too much above $80. Oil above $80 would slow down demand growth and hurt rebounding economies with inflation.
Meanwhile, the world’s third-largest oil importer, India, called on OPEC+, again, to ease the cuts and stop the price rally threatening demand recovery from price-sensitive buyers.
Current prices, of around $75 a barrel, are “challenging” for price-sensitive buyers such as India, its Oil Minister Dharmendra Pradhan said last week, adding that he is “persuading [his] producer friends” to work for a reasonable oil price.
Still, rising demand amid OPEC+ quarrels about a supply agreement is set to push prices higher, at least until oil tests the threshold where demand destruction begins.
“We’re in an environment where demand is rising for oil. This uncertainty about the supply outlook will feed into higher prices,” Amir Khan, senior economist at Saudi National Bank, told Bloomberg Television on Sunday.
By Tsvetana Paraskova for Oilprice.com
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