Oil demand is recovering globally, assisted by accelerating vaccination campaigns that help lift lockdowns, and amid a conservative OPEC+ policy prices are rising to new multi-year highs above $70 per barrel, with upside on the horizon.
A reopening of Europe, strong Chinese industrial activity and recent encouraging signs from the US provide bullish signs to traders across the world, and are key drivers for the ongoing rally.
As economies enter a more normalized period, oil use is increasing, and the demand that is generated is causing prices to rise, especially when the supply outlook screams deficit.
Some Iranian sanctions were lifted yesterday and the US diplomacy move can be read as an act of good faith that should further move along progress in Iran nuclear deal negotiations.
However, the sanctions that were lifted were not directly related to the oil sector and do not yet signal any premature return of Iranian oil barrels to the market.
Based on the latest developments, however, we see an increased likelihood of a deal, and thus more potential risk of bearish oil price fundamentals over the next few months.
An earlier-than-expected Iran deal would hasten the return of the nearly 1 million bpd of Iranian barrels, perhaps as swiftly over 4 months. This would certainly be a mini supply shock to the still fragile oil market, but not one that can’t be absorbed by the improving demand backdrop.
The consensus is that the OPEC+ will in fact have to break with its conservative approach that is credited with supporting oil prices since last year and is the backbone of the bullish oil price sentiment.
OPEC+ will need to loosen the valve and bring more supply back faster, otherwise risk a further price surge.
A continuance of the group’s supply restraint would put the group behind the demand curve and fire up prices and risk overheating the market.
Last but not least, when the IEA is going out with a report saying that more oil needs to be produced by OPEC+ to meet the oil demand recovery of 2022, the market can’t ignore the clearly bullish signal.
Supply conservatism by OPEC+ has supported oil prices since last year and is the reason prices have now reached such highs.
There is definitely room for OPEC+ to boost output from the second part of this year and as long as this doesn’t happen, there is a definite upside for oil prices.
OPEC+ policy after July this year will determine prices going forward and it is seemingly the only variable that could stop this rally – which shows the price formation strength that Russia and Saudi Arabia are currently holding.
