Oil prices shifted from gains to losses and back this morning as concerns over Covid-19 infections and US fuel stocks battle against positive financial data.
The number of new Covid-19 infections continues to rise and set new records in several countries around the world, such as India, a major oil consumer. US cases are also on the rise, affecting the market.
For the oil market to recover, the world needs further progress in fighting the pandemic, a slowing infection count and a gradual withdrawal of lockdowns and restrictions.
Oil prices are understandably held back from robust growth until the needed pandemic breakthroughs are in place.
Although now traders are being cautious with prices, the summer should mark a turn when vaccination campaigns are expected to reach a satisfactory initial level to allow a gradual return to social normality.
Digesting last week’s US oil stocks data should be done with a bit of salt. While crude stocks are projected by API to have fallen last week, gasoline inventories are expected higher by several million bpd.
A forecasted rise in US gasoline inventories by API during a week that usually sees an uptick in road fuel demand as people travel during the Easter break is a negative indication and the market quickly realized it, looking behind the crude draws, therefore keeping oil price fairly stable.
For refinery demand though, crude draws are a positive indication, and that’s what moved the market earlier in the day. The final EIA data are needed to confirm it but a draw would validate that refinery demand is not only recovering from the winter storm but from a year of Covid-19.
On the diplomacy front, although the world and the US in particular are not anywhere close to a deal with Iran yet, Tuesday’s “constructive” dialogue makes the Iran supply wild card a bit less wild of a reality.
If negotiations progress and there is a breakthrough that would lift Iranian sanctions, the market will need to price in a significant amount of oil returning to export mode, which would impact global balances at a time when they are fragile.
The market is adding a pricing touch to these negotiations, but there is much more to calculate if indeed Iranian supplies return. Any return would have to be gradual though, as Iran would need several months to return to a full-scale production mode.
Despite the continuous set of new hurdles in navigating the vaccine and lifting of lockdowns, we still believe that overall, optimism for economic recovery will drive oil demand to finish 2021 strong and average 95.4 million bpd.
At the same time, the market is still digesting the very abrupt policy shift of OPEC+ which went from months of preaching caution and keeping oil production flat to agreeing to let more than 2 million bpd of oil on the market by July 2021.
We believe this action is in line with the expected oil demand trajectory, which we see expanding by about 3.2 million bpd between now and July 2021.
So there are still some supply-side opportunities, and yesterday the EIA made it clear that US volumes will not be picking up too many of the crumbs.
The EIA lowered its 2021 production outlook by 110,000 bpd compared to its March estimate, and now sees average 2021 production at 11.04 million bpd, still a bit lower than Rystad Energy’s forecast of 11.20 million bpd.
Both estimates indicate that US shale will not be fired up to a degree to break the market balance that OPEC+ is aiming to achieve, which we believe is keeping oil prices in the high $50s, but more likely, low $60s.
