Head of Commodity Strategy
Summary: Ahead of today's OPEC+ meeting Brent crude oil has reached a four-month high above $70 while WTI crude oil trades at the highest level since October 2018. Driven by tightening market conditions as OPEC+ keep production tight and a continued recovery in global demand as vaccine rollouts support increased mobility.
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OILUKAUG21 – Brent Crude Oil (August)
OILUSJUL21 – WTI Crude Oil (July)
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Ahead of today’s OPEC+ meeting Brent crude oil has reached a four-month high above $70 while WTI crude oil trades at the highest level since October 2018. Driven by tightening market conditions as OPEC+ keep production tight and a continued recovery in global demand as vaccine rollouts support increased mobility. The recent run up in prices culminating with today’s breakout has been led by WTI crude oil amid seasonal low U.S. gasoline stocks ahead of an expected busy summer driving season and crude stocks at Cushing, the WTI delivery hub, some 17% below the five-year average.
While the recovery in global fuel demand remains far from synchronized due to concerns over tighter Covid-19 related restrictions in Asia, the market seems happy in the short-term to focus primarily on the positive demand outlook in the U.S. and parts of Europe.
OPEC+ meets later today at 14:30 Vienna time, and while no additional production increases beyond the already agreed 0.8 million barrels/day for July is expected, the market has taken comfort from a very upbeat assessment by the groups Joint Technical Committee (JTC). The group confirmed OPEC’s latest assessment for a sizeable average 6 million barrel/day jump in oil demand in 2021. With no additional production increases beyond July the group expect a rise in global demand by December of almost 100 million barrels/day could trigger a daily deficit of 2.3 million barrels/day.
How the group and non-OPEC producers respond to the rising deficit will determine how far crude oil can rise over the coming months. With no action the price of Brent crude oil could be on course to reach $80/b before yearend, but as always plenty of developments could scupper such a forecast. The most important being the prospect for additional barrels from either OPEC+ or Iran, should a nuclear deal be reached, and not least prolonged (or new) Covid-19 lockdowns, especially in Asia.
Since their last meeting the prospect for surging non-OPEC+ production has faded with oil companies, many now constrained by Wall Street investors demanding action to fight climate change, not rushing to increase production to chase rising prices. So far even drillers in the Permian, the prolific shale basin in Texas, have shown restraint in order to avoid the boom-and-bust cycles of the previous decade. With this in mind the group may be tempted through inaction to support even higher prices in order to receive strong paydays before demand eventual starts to taper in a few years’ time.
However, such a step would raise another challenge that OPEC+ needs to address. A prolonged period of inaction allowing oil prices to rise further, could see inflation, through higher fuel cost, become even more entrenched and prolonged, eventually curbing growth and with that demand for crude oil.
Taking all these consideration into account we do not see the price of oil being allowed to rise as far as $80/b, however having broken back above $70, the next line in the sand around $72 would determine whether Brent has got enough momentum to challenge the thirteen year downtrend from the 2008 peak, currently around $78. We would however view a move of this magnitude as an overshoot that eventually may prove to be short-lived.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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