All eyes in the world of oil are on the OPEC+ ministerial meeting this week, where officials will be discussing crude output levels and supply for later months. Naturally, buyers will be trying gauge what’s in store next, after the bullish run we have seen in the USOIL markets recently.
At the moment, the commodity is sitting around its highest price since October 2018, and there are whisperings that demand is set to pick up significantly during the second half of the year. Given that the OPEC+ have kept output levels on a tight leash in recent months, with global economies now beginning to consume more oil, expectations are mounting that the organisation could loosen its hold and increase supply.
OPEC’s Barkindo calling for prudence
WTI was trading around the $73 level ahead of the OPEC meeting and between two US inventory reports. Yesterday, OPEC’s Mohammed Barkindo warned that significant uncertainty in oil markets calls for prudence, highlighting the considerable risk to demand outlook from Covid variants.
OPEC and its allies are due to set out production for August amid an increasingly tight market. Meanwhile API data showed a draw of 8.2m barrels for the week ended June 24th, the sixth straight weekly decline. Gas inventories rose 1.3m barrels, whilst distillates rose by 400k. Official EIA figures due later today (Wednesday) are expected to show a draw of 4.7m barrels.
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Eyes on Iran and the further spread of COVID (D)
However, there are two main factors that could undermine this narrative – the first being the recent spike in new COVID-19 cases around the globe, driven largely by the more infectious Delta variant. Particularly as Australia and New Zealand have not yet vaccinated so much of their population, the rise in cases means that a recovery in demand might be a slippery prospect, with these countries remaining vulnerable to further lockdown restrictions.
Secondly, ongoing talks between Iran and other world powers regarding the revival of Tehran’s Nuclear deal could prove another setback, should these negotiations take longer than expected. Although many analysts expect this output to be absorbed, it could potentially result in some short-term downside.
“Clearly, it will be a careful balancing act for the OPEC+ to keep oil prices well-supported, while bringing extra production to market,” observes Giles Coghlan, Chief Currency Analyst at HYCM. “Some reports suggest that the cartel is mulling over bringing additional supply online in response to the fast rebound in demand, but how much more can they bring to the table?”
Current estimates suggest that this could look like an extra 500,000 to 1,000,000 barrels per day. “Ultimately, the bottom line is that as the global vaccine rollout continues, the general outlook for USOIL is optimistic, and deeper pullbacks that are backed around $68 would be a clear buy,” Coghlan says.
OPEC’s bullish demand outlook for the second half combined with the OPEC+ groups ability to control the price, has helped drive Brent above $70 while WTI has reached levels last seen in 2018. In response to these developments hedge funds increased their combined crude oil net long by 25.2k lots to 649.5k in early June, a three week high but still some 88k below the recent peak in February. It is worth keeping an eye on their activity in the market.