Rystad Energy’s daily market comment from our Oil Markets Analyst Louise Dickson:
This week keeps on giving for oil prices, as back to back positive signals keep prolonging the bullish rally.
Oil demand is not only supporting oil prices at a forecast level. The real results of the demand recovery are now visible too, with the latest touch being the API institute’s projected massive 8.5 million barrel storage draw in the US.
Forecasts for a massive inventory draw provide a definitive optimism boost and are pushing oil prices towards $75 per barrel.
If such a mega draw materializes, we expect further upward support for oil benchmarks, as such a large draw would imply a stark ramp-up in refinery runs or exports, both bullish indicators.
The API also projected a build in gasoline inventories of 2.9 million barrels for the week ending June 11. Our real-time data shows that gasoline demand in the US increased by 2% in the week ending June 11 versus the week ending June 4.
Unless there was a massive undetected surge in imports, the increased demand for gasoline should in fact result in draw in gasoline stocks, adding to the bullish oil market tightness.
The current market tightness – and consequent high price momentum - is likely to hold at least until 1 July 2021, when OPEC+ next meets to plot out if and how much supply to release back onto the market.
With more than 9 million bpd in spare capacity that could be brought back online in 3 months or less, OPEC+ can easily bridge any supply gap ahead of the peak demand season in August.
Upward momentum in oil prices is warranted until the market gets a hint on OPEC+ future plans, whether that is at the July 1 meeting or sooner.
We share the optimism of the big trading houses that warn of higher oil prices over summer, but further along the oil futures curve, the market tightness may not be sure to stay.
The oil price could get another shock to the system as the lack of vaccines and spread of mutations in the developing world continues to prevent full recovery of oil demand. So while right now there is a summer flush of pent-up travel demand on the back of vaccine success, this could fade towards year-end.
There is another concern in the oil market, the so-called commodity super-cycle, and if the current frothiness in oil prices is to some degree a function of inflation.
Inflation isn’t reflected in oil futures the same way it is in other sectors, but that doesn’t mean oil prices are fully isolated from inflation, as higher nominal purchasing power of consumers and costs of E&Ps to develop upstream projects carry inflation. In particular, the oil service sector carries inflation.