The gloom that had enveloped the global oil market for the past several weeks as traders suspected demand growth would slow this week has given way to signs of emerging optimism, all because OPEC reiterated what it said at its June 2 meeting.
At that meeting, the cartel's leaders announced that they might consider rolling back some of the production cuts agreed last year, possibly as late as 2024, if market conditions remain favorable. What traders heard, however, was that they would definitely roll back those cuts. Prices plummeted. OPEC had to reiterate what it had said, and more emphatically.
“Funds that thought we were heading into a production war quickly had their concerns allayed when OPEC+ members launched a PR campaign to reassure the world that their changes in production would be market dependent,” StoneX oil analyst Alex Hodes told Reuters on Monday.
Expectations of strong fuel demand in the United States this driving season also boosted rising sentiment. This reversal in prices, snapping a three-week losing streak, came despite lower-than-expected industrial activity data from China. The country reported factory output growth of 5.6%, which would normally be a solid enough figure. However, analysts had expected a 6% increase, so Reuters labelled the actual reading as disappointing. Related: Brazil seeks to challenge China's dominance in rare minerals
Still, that did not dampen oil traders' optimism, as it was understood that OPEC would not return any supply to the market until the price was right. Reuters' John Kemp reported in his latest column that speculators had bought back some of the oil futures sold immediately after the last OPEC+ meeting, with total purchases equivalent to 80 million barrels in the week to June 11.
Still, Kemp wrote that overall bearish sentiment remained dominant among oil speculators due to OPEC+ having spare capacity and rising production from places like the United States, Guyana and Brazil. Interestingly, energy consultancy Rystad Energy recently predicted that global oil supply growth would be almost negligible this year due to cuts by OPEC+ without mentioning spare capacity.
The firm pointed to OPEC+ cuts and their recent extension into next year, and said that “US shale remains a reliable source of growth, although less resilient to price changes and more consolidated following a sustained round of mergers and acquisitions. This reduces the short-term potential for surprises in US growth.”
In fact, the Energy Information Administration recently forecast average oil production in the U.S. this year at 13.2 million barrels per day, a modest 2% increase from this year. Next year, the EIA estimates that production will rise by half a million barrels per day to 13.7 million barrels per day.
With consolidation underway in US shale and uncertainty about which direction oil prices will go on any given day, much less in the long term, drillers are not really keen to drill. The claim that US shale will step in to ensure adequate supply no matter what happens elsewhere is no longer true in an era of capital discipline and investor returns.
Meanwhile, volatility remains. If fuel demand continues to fall short of expectations, a weekly EIA report would be all it would take to change the direction of prices. Some believe it will take even less time, since much of the recent buying that has pushed prices up a little was actually done to cover short positions, according to Bob Yawger of Mizuho Securities.
On the other hand, a bullish EIA report on inventories would push prices higher further — and create a problem for the Biden administration, which is considering more emergency releases from the SPR to keep gas prices low in the months before the November elections.
By Irina Slav for Oilprice.com
More top articles from Oilprice.com: