As long as the rising oil demand continues to drain crude stocks and global producers don’t fill the gap with additional output, prices will be rising.
The sizeable draw that API is forecasting for last week is adding to the bullish storage relief that we have seen in recent weeks, and is supporting prices ahead of the official EIA report today.
Prices could rise even further if OPEC+ doesn’t increase supply to match the rapidly expanding oil demand. OPEC itself expects a demand growth of about 5 million bpd in the second half of 2021, so members are not expected to be very conservative in the coming meeting.
OPEC+ would be prudent to tap into its vast spare capacity and bring stability to the oil market. Real-time data supports the thesis that a robust demand recovery is flourishing.
Planes in the sky and cars on the road will drive refinery utilization higher in the next quarter, especially concentrated in the busy summer season.
In the high August season, OPEC+ could theoretically raise production by at least 1.5 million bpd to meet the demand spurt and still keep the market in equilibrium.
However, given that the shoulder season is just around the corner, it is unlikely OPEC+ will take such a bold supply move on account of keeping the market in a perfect balance.
Instead, we expect a modest supply increase more in line with the cautious approach OPEC+ has demonstrated since reigning in global supply since the mega cuts were enacted in May 2020.
If OPEC+ decides to “seize the day” as demand ticks up over summer and goes for an increase of 750,000 bpd or higher, some downward pressure on prices may materialize despite the market being able to comfortably absorb 1.6 million bpd in August.
A boost larger than 750,000 bpd would be an indication that either OPEC+ believes in a rapid demand arc or that the Russia-led supply hawks of the group were more persuasive in negotiations.
Even though many market players are calling on OPEC+ to balance the market by adding more supply, OPEC+ of course has other considerations such as the logistics of reopening wells, upstream developments, and budgetary concerns.
If OPEC+ goes for an increase below the 500,000 bpd, this could trigger an incredibly tight, high price environment.
Nevertheless, increasing supply cautiously could prove wise given the downside price risks associated with Covid-19, the possible return of Iranian barrels, slipping compliance from Russia and Iraq, a possible mini supply surge from US shale and the prospect of a weaker than expected autumn season.
