Oil market in positive mood ahead of expected economic growth

The huge global oil reserves accumulated during last year’s economic slowdown have almost all been drained, paving the way for a price recovery just as the global economy is expected to pick up speed in the second half of this year.

The oil market was in a positive mood in May after both OPEC+ and the International Energy Agency issued 2021 forecasts for oil demand averaging 96.5 million barrels per day (mbd) and 99.6 mbd respectively. Brent Crude passed the $70 / barrel mark on 18 May, for the first time since March, and WTI Crude traded at above $66 / barrel.

Since then, the prices have fallen back on fears that the surge in Covid-19 cases in India, Thailand, Vietnam and Taiwan, will prompt lockdowns and slow economic growth.

In Europe and the United States, successful Covid vaccination programmes, a relaxation of travel bans and a strong recovery in industrial activity have all created conditions for growth in fuel demand, though oil use has been weaker than expected in the first quarter. The IEA says global oil demand would have been higher but for weak demand in the first quarter in developed countries and for India’s Covid-19 crisis dampening demand in the sub-continent.

Economic growth to drive Oil demand

The driver of global oil demand is economic growth across all major economies. OPEC’s 2021 forecast for global economic growth stands at 5.5% y/y, after falling 3.5% in 2020. Among developed economies, the US is leading with expected growth of 6.2%, after a contraction of 3.5%, followed by the eurozone at 4.2% (-6.8%) and Japan at 3.0% (-4.9%). China, the world’s biggest importer of crude, slowed to 2.3% last year but is forecast to see growth of 8.5% this year. India, after contracting 7% in 2020, is forecast to grow 9.7%.

In its May report, IEA says world oil supply for 2021 is set to expand by 1.4 mbd y/y, versus last year’s collapse of 6.6 mbd. By the end of the year, with extra production from OPEC+ countries, including Saudi Arabia, as well as Canada, North Sea and Brazil, world oil production is forecast to rise by 3.8 mbd from April. Nevertheless, under the current OPEC+ production scenario, supplies are unlikely to keep up with the expected recovery in demand, adding to the upward pressure on prices.

Oil price volatility

The oil price is always prey to unexpected events, such as public commentary from key global players. On 18 May, in the week after IEA issued its monthly report, the WTI price plunged to $64.20 after Mikhail Ulyanov, Russia’s envoy to the Iran nuclear deal talks in Vienna, stated to the BBC that “negotiations have made major progress”. The fall in price was due to market expectations that the long-awaited deal with Iran would relax regional tensions and that Iran would resume oil exports. However, Ulyanov rowed back on his comments and within an hour the price was back over $65.50.

The widening gap between supply and demand is creating hopes that the OPEC+ supply restrictions will be eased, as demand for oil grows. But uncertainty remains, thanks to the ongoing intractability of Iran-US nuclear talks and the current Covid-19 crisis in India and elsewhere, always with the potential for further outbreaks and lockdowns weighing on demand for oil and adding to market volatility.

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