The reason oil prices are trading lower today is that the market, despite the recent bullish signals, started realizing there is some reluctance from the buy-side to support the current high price levels.
Traders started realizing that oil might be getting too expensive for too long after China’s half year crude imports were reported to have fallen by 3% against the same time in 2020.
As China is the world’s top crude oil importer, a decline in imports, especially since it is the first one since many years, is a significant price signal for the market to step on the brake pedal.
High oil prices were not the only variable affecting China’s imports, as maintenance weighed in too, but definitely one that contributed to the fall.
Chinese data raised some eyebrows today but in the other side of the Pacific, oil demand in the US is booming.
The market expects a tenth consecutive week in US crude inventory draws, while the IEA report warns of a “significant tightening” of the oil market if OPEC+ doesn’t raise production.
The bearish factor of US inflation accelerating to 5.4% in June y/y has raised the possibility of the Fed enacting an interest rate hike sooner than expected, but so far hasn’t materially weighed on prices. A stronger dollar however, sooner or later, will put downward pressure on the price of the barrel.
Potential demand destruction from the Delta variant is also being somewhat shrugged off for now, as the damage is mostly contained to Asia, but the highly contagious variant is penetrating into Europe and is already derailing reopening plans, which carries near-term downside risk.
As it is estimated that a country would need an 80% vaccination rate to fend off the Delta variant, a target not yet reached by any nation, the variant could have a real impact on global economies.
A confirmation of a decrease in both crude and gasoline stocks in the US could be a deservedly bullish development and prices may take notice, though it is unlikely the draws will match the massive levels reached over the Fourth of July holiday week.
The most interesting data point to watch is if there is a continued divergence in crude and gasoline versus distillates, which are generally a better barometer of economic trends and freight transports.
Meanwhile, OPEC+ has not yet definitively signaled whether it will step in and meet the anticipated demand boost.
There is enough spare capacity within OPEC+ to meet the crude demand increase to year-end and return the market to equilibrium, cooling down the risk of an overtight and overheated market.
With more than 8 million bpd of spare capacity, 2 million bpd of which is in Saudi Arabia, there is room for maneuvering.
So far, the alliance has managed to create an artificially tight crude balance throughout 2021 by staying “behind” the demand curve.
We find it more likely than not that OPEC+ will raise production in August compared to July levels, whether by policy or lack thereof. Looser compliance, led by Russia, could likely result in at least a 300,000 bpd increase month on month in August, according to our supply forecast assumptions.
We expect continued bouts of price volatility throughout the summer months in the run-up to a very bullish forecasted 1.5 million bpd implied crude stock draw for August 2021 and then a subsequent dip when the shoulder demand slump season hits in October 2021.
Overall, we remain constructive on oil prices through the end of the year, with a forecasted average crude draw of 460,000 bpd over the course of the second half of 2021..
Last but not least, the bullish sentiment could also be brought to a halt irrespective of a new OPEC+ deal.
A nuclear deal from Iran, mass non-compliance from OPEC+ in August 2021, or even a potential breakup of the alliance could easily help fill the supply gap and normalize oil prices, which essentially means lowering them.
