If oil storage was a glass, traders would definitely describe it as half-empty, judging from the strong price reaction after another weekly inventory draw.
The bulls got to throw another fist in the air with the sizeable 7.6-million-barrel draw in crude inventories in the US, as the fifth consecutive draw in storage signals a sustained returned of oil demand in the high-demand summer season.
There was an extra bullish surprise in gasoline data, which the EIA reported fell by 2.9 million barrels last week, a counter-seasonal trend that implies gasoline demand may be on a premature rise for this driving season already, and seasonal runs could already peak as early as July instead of August.
The strong summer price squeeze is already visible in $75 per barrel oil prices.
The market can expect a steady rise in refinery runs through August 2021, which will result in a 1.6 million bpd implied stock draw, but then seasonal builds, peaking at 1 million bpd, are expected to follow in October.
The swing in between these extremes will create both volatility and opportunity. The total liquids balances show a much tighter second half of the year on account of vaccines ushering in faster end-consumption recovery.
However, there is still potential for some excess inventories in the summer months, even as refineries run throughput to the max to meet gasoline demand, and other ‘bi products’ such as distillates may be left to build in storage.
While the summer demand profile is upbeat, it may be tricky for oil suppliers and refiners to correctly time the market ahead of the usual autumn seasonality slump, as Covid-specific factors may exaggerate or alter normal seasonality trends.
The next two weeks ahead of the OPEC+ policy meeting on 1 July 2021 will be extraordinarily tight for the oil market, OPEC+ is expected to loosen supply, either officially with a higher production target or unofficially with compliance slippage.
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.
If OPEC+ wants to keep the market in a theoretical equilibrium, the group could boost production as high as 39.5 million bpd in August 2021, but then needs to scale it down back to 36.8 million bpd for October during the shoulder demand season.
This would indeed be a supply swing risk that OPEC+ would want to avoid, especially as once countries are allowed to increase production, it is harder to back-step and again tighten supply.
While OPEC+ could theoretically go for a nearly 3 million bpd boost in August and the market could most likely absorb these volumes without destroying price integrity, we see a more conservative 1 million bpd boost in the cards with a monthly 500,000 bpd ramp up should OPEC+ continue its chorus of caution.
Meanwhile, the market is cautious on how to digest developments on the negotiating table between the West and Iran.
Traders did not overreact when Iran said there was a deal that would lift sanctions, and rightly so as the US and other countries kept a more conservative approach as negotiations are still ongoing.
A deal and the return of Iranian barrels won’t be final until it is, and traders will be looking for official confirmation before touching oil prices to price in the extra supply.
