The pessimism that has gripped the global oil market for weeks, as traders doubted that demand growth weakened this week, began to dissipate, to be replaced by signs of increased optimism. All because OPEC repeated what it had said at the June 2 meeting.
At that meeting, cartel leaders announced they may consider reversing some of the production cuts they agreed to last year, possibly as late as 2024, if market conditions are favorable. What traders heard, however, was that they would almost certainly reverse those cuts. Prices fell. OPEC had to say what it had said again, more emphatically.
“Those funds that thought we were heading for a production battle were quickly assuaged when OPEC+ members launched a PR campaign to reassure the world that their output changes would be market-driven,” the analyst told Reuters on Monday. of oil at StoneX, Alex Hodes.
The developing sentiment also received a boost from expectations of strong demand for fuel this driving season in the United States. The reversal in prices, after they snapped a three-week losing streak, comes despite sub-par industrial activity data from China. The country reported factory output growth of 5.6%, which would normally be a fairly stable figure. However, analysts had expected growth of 6%, so the current reading was called disappointing by Reuters. Related: Brazil seeks to challenge China’s dominance of rare earth minerals
However, even this could not dampen the optimism of oil traders as it suffocated, as OPEC would not return any supply to the market unless the price was right. John Kemp of Reuters reported in his latest column that speculators had bought back some of the oil futures they had sold shortly after the last OPEC+ meeting, with total purchases at the equivalent of 80 million barrels in the week to June 11.
However, Kemp wrote that the overall decline remained the dominant sentiment among oil speculators because of the spare capacity that OPEC + has and because of increased production from countries such as the United States, Guyana and Brazil. Interestingly, energy consultancy Rystad Energy recently predicted that global oil supply growth will be virtually non-existent this year due to OPEC+ cuts without mentioning spare capacity.
The firm noted OPEC+ cuts and their latest extension next year and noted that “US shale remains a reliable source of growth, albeit less resilient to price changes and more consolidated after rounds of continuous mergers and acquisitions. This reduces the near-term upside potential for a US growth surprise.”
Indeed, the Energy Information Administration recently forecast the average rate of oil production for this year in the US at 13.2 million barrels per day, which would be a modest increase of 2% annually. Next year, EIA sees production increasing by another half million barrels per day to 13.7 million barrels per day.
With the consolidation taking place in US shale and uncertainty about which way oil prices will go on any given day, let alone over the longer term, drillers aren’t exactly eager to drill. The pretense that whatever happens elsewhere, US shale will step in to ensure sufficient supply is no longer true in an era of capital discipline and investor returns above all else.
Meanwhile, volatility remains high. A weekly EIA report is all it would take to change the course of prices if it suggests that fuel demand is falling short of expectations. Some believe it would take even less because much of the recent buying that saw prices inch higher actually covered short positions, according to Bob Yawger of Mizuho Securities.
On the other hand, a bullish EIA report on inventories would push prices further — and create a problem for the Biden administration, which is already considering more emergency releases from the SPR to keep gas prices higher. low in the months before the November elections.
By Irina Slav for Oilprice.com
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