Oil prices really are in a positive June upswing as demand and supply are recovering in an unequal speed.
While oil demand is rising globally, with live traffic data suggesting increasing consumption of road and jet fuel in the US and Europe, June is a transition month for supply.
OPEC+ has set a supply management policy through July and plans to keep disciplined, taking baby steps while nuclear negotiations with Iran ongoing.
Negotiations with Iran don’t yet have any breakthrough but a deal could bring back 1 million bpd of supply to the market.
When there is no supply reaction to the now more and more visible demand uptick, prices are bound to keep strong at a sustainable level, and this week proves that what we are seeing now is not a price bubble.
Bubbles can grow to be big but they burst quickly. The current price levels have a solid supply-demand foundation and they are building on concrete signals.
Bullish reports, including a recent one by the IEA that called for more OPEC+ supply going forward to meet the rising demand, adds to the market enthusiasm.
A significant market reaction could occur when OPEC+ meets again on July and begins to set the group’s new supply consensus for the second part of the year.
The decision by OPEC+ to be overly cautious in returning supply to the market, whether this is true caution or they are intentionally stoking oil prices higher, has been a main tenant in seeing $73 per barrel Brent.
In addition, the relative lack of supply response from the US, particularly from US shale which is prioritizing free cash flow over production, has also kept prices in a cushy range.
Government stimulus packages and the rollout of vaccines have, and will continue, to increase demand for oil and oil products in the months to come.
The US, where stimulus and vaccines have been deployed in a rapid timeline, has already seen an 8% increase in gasoline demand in June compared to three months ago in March.
The expectation is that refineries will continue to ramp up demand ahead of the summer travel season. Unless imports grow significantly, US inventories should draw throughout the summer months.
Therefore, if the API crude inventory data later today forecasts a thinning of crude and crude products in storage, the news could add further fuel to the recent price surge.
Looking at the US, the central bank meets on Wednesday and while no interest rate changes are expected, any indication that the Fed is getting hawkish on future monetary policy could deliver a small blow to oil price gains.
