The continuing increase in Covid-19 infections in many parts of the world deepened concern among traders about the future of demand, which led to an outflow from oil futures contracts, Reuters’ John Kemp wrote last week.
Funds had cut their positions across the six major oil contracts for two out of the last three weeks, given the pandemic situation and the persistent uncertainty around jet fuel demand recovery.
An earlier report from Reuters this month cited a refining executive as saying there were signs of a pick-up in jet fuel demand.
“Jet fuel demand numbers are starting to improve and show signs of life, allowing refiners to drop less jet into diesel which will eventually provide well-needed relief on distillate stock,” Joe Israel, chief executive of Wet Coast refiner Par Pacific, told Reuters earlier this month.
Meanwhile, the EU is still struggling to rein in the disease, with cases on the rise in many parts of the continent despite lockdowns and curfews, and cases are also rising in the United States, which is perhaps more worrying because, unlike the EU, the U.S. has done well with vaccinations.
At more than 4 million vaccinations daily over the past week, the U.S. inoculation drive is accelerating, but new cases eclipsed the average for July last year, with states reporting a total of 70,000 new diagnoses on average every day during the period.
To further complicate the outlook for oil, India is also reporting a sharp rise in new infections. As one of the main drivers of oil demand and one of the two main reasons prices rebounded after the worst of the pandemic, the news from India is particularly depressing for oil bulls.
No wonder then that traders are exiting their oil positions, leaving the total at 799 million barrels across the six most traded crude oil and fuel contracts in the week ending April 6, Reuters’ Kemp reported. That’s down from a peak of 913 million barrels hit on March 16, he added.
Meanwhile, oil prices appear to be stuck around the $60 mark with only slight movements up and down driven, most recently, by a weaker U.S. dollar, Bloomberg reported earlier this week. The increasingly frequent attacks by Houthi rebels on Saudi oil infrastructure, on the other hand, have failed to push prices higher for any length of time, likely because of the limited damage they tend to do, if any at all.
“Oil is in wait-and-see mode for the next catalyst,” Giovanni Staunovo, commodity analyst at UBS Group, told Bloomberg. “The accelerating pace of vaccination we already see slowly will result in less mobility restrictions and support oil demand and prices.”
U.S. airlines are already reporting higher passenger numbers, which bodes well for the immediate future for jet fuel demand. However, the rising infection rates continue to be a strong headwind.
Other headwinds, according to Morgan Stanley at least, include increased U.S. oil drilling and Iran’s growing production. In a recent note, the investment bank said it expected oil prices to remain range-bound between $65 and $70 per barrel during the summer, largely because of these two factors, which, according to the bank’s analysts, are taking the steam out of the oil price recovery.
U.S. shale drillers were reluctant with their latest production ramp-up, but as prices remained consistently higher than last year’s, many braved a step-up in production. The country’s average is still far from pre-pandemic record levels of 13 million bpd, but the output ramp-up trend may turn out to be a steady one in the absence of sudden disruptions of the current market situation.
Iran, meanwhile, is banking on reaching an agreement with the United States soon, so the U.S. could return to the nuclear deal and lift sanctions. In anticipation of this lifting, Tehran is also boosting oil production at a time when OPEC+ is also beginning to relax its production curbs, planning to add some 2 million bpd to global supply over the next three months.
By Irina Slav for Oilprice.com
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