Oil prices have been increasing for some time as a result of multiple positive projections for a summer recovery in global oil demand, but as now a $70 plus level has been established for Brent barrels, traders start to price in some uncertainty over the uneven recovery trajectory.
Some of the price losses of this week is profit taking by market participants and a stronger dollar is also helping the decline, but in the end one of the most important factors for gains by traders is which demand forecast to believe.
Most of the demand forecasts are positive that summer demand for crude will exceed the available supply and prices have followed. But not all forecasts are even and some over-optimism is likely being corrected this week.
The concern over the demand forecasts is caused by evidence that the spurred consumption of refined oil products in the US and the EU is weighed down by lags in countries experiencing third waves.
India is a still worrying the market and extended lockdowns in Japan, Thailand, and Vietnam are also being priced in.
In the US, oil demand for road fuels (gasoline and diesel) has already recovered to above 13 million bpd in the first few days of June 2021, a seasonal high not seen since June 2019.
In Europe, the summer travel season has driven road fuels up to 7.3 million bpd, a level not seen since October 2020.
The $70 per barrel Brent oil price threshold is thus reasonable as we approach the strong summer demand season. The summer seasonal demand trends will be amplified as economies reopen and demand for refined products, particularly gasoline, improves.
Demand for crude, kicked off by the high summer gasoline-guzzling season and sustained by a return of lost Covid-19 oil demand growth, will also be quite strong in 3Q21.
To forecast the velocity at which oil demand will recover, which in the end makes the difference for the price direction at the moment, it is the real-time data that indicates the scale refineries need to ramp up gasoline, jet, and diesel runs to meet recovering demand in countries approaching 50% vaccination rates.
As crude prices tick up, so do refining margins for refined products, and like oil, investors could also decide it’s a comfortable time to cash out. A significant sell-off in products would slow down the inventory clear-out and again stifle oil price recovery.
The trend to watch is whether a similar pattern emerges not just in crude, but across the petroleum product suite – if inventors decide there is more money to be made in gasoline, diesel and other products, or if margins are already high enough for a comfortable cash out.
A significant sell-off in products, could slow down the inventory clear out even further, so this week’s trend is one to look carefully at in coming days.
