Strong summer demand expectations and a current halt in negotiations to revive a nuclear deal with Iran supported prices in the early trading, but the supply side spilled the bullish beans later in the day, swinging prices to loss mode.
Reports that OPEC+ is already discussing, ahead of its scheduled meeting, to increase its output from August indicates that the demand-supply gap is already becoming an issue and that the alliance is working on a plan to tap that deficit.
The OPEC+ chatter to raise supply is the most bearish risk for the recent oil price rally, which has been propelled on strong summer demand and an overall conservative supply environment.
It’s not that the market didn’t expect to see OPEC+ increasing output further after July, but a reported confirmation of ongoing discussions is deflating oil prices a bit today, as it reassures traders of the coming supply.
OPEC+ will likely loosen supply, either officially with a higher production target from August or unofficially with compliance slippage even earlier.
In fact it is possible that even the current target production level of 36.2 million bpd for July 2021 will likely be surpassed by at least 1 million bpd of OPEC+ crude supply, and perhaps even more, as OPEC members see the demand-supply gap widening.
Currently, our crude balances indicate a potential implied stock draw of more than 1 million bpd for August 2021, which is sizeable and deserves bullish treatment but is not uncommon in what is always a seasonally high travel month.
By August, we expect oil demand will have recovered to nearly 98 million bpd from the current level of 95.3 million bpd.
The anticipation of the nearly 3 million bpd “demand pop” in the very near-term has brought Brent oil prices above $75 per barrel. However, the ascent to mid-70s oil prices has been sudden, so just how resilient the price curve structure is still untested.
On another note, inflation is on everyone’s mind, but exactly where it lurks in the oil price is not fully transparent.
Outside of the crude price itself, inflation can creep up at every stage of the supply chain of producing oil, from raw materials to service prices.
A historical example is in the 1970s when surging oil prices led many countries down a road of reduced economic growth, higher interest rates, and other related industry collapses.
The pandemic pause in the production of goods is now resulting in inflation visible in everything from construction materials to new cars, and commodities.
If prices are not given a proper dousing, there will be a continued upward march in refined products pricing on all levels of the barrel.
Higher gasoline prices could provide elasticity on summer driving demand, and higher maritime fuels will spill over into the freight market and potentially create a challenging margins environment for midstream players.
