Why oil Prices keep on moving strongly

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CBN

Louise Dickson:

Oil prices have risen to quite high levels this week but back-to-back gains can’t continue indefinitely.

It’s remarkable that prices are so high with the pandemic not being yet fully behind us and the real news of the day is that strong prices keep their gains today.

The dust from the latest, uneventful, OPEC+ meeting has settled, yet the trader enthusiasm hasn’t.

The policy discipline that OPEC+ has shown and the confidence over this summer’s demand recovery are strong enough to keep the high prices relatively unchanged today, which in itself could be an indication that no large correction is due soon.

 The summer oil demand surge is already showing its colors in the US, UK, and Europe, where road fuel use is expected to increase even more as the population is trying to make the best out of the season after a year of restrictions.

The OPEC+ decision to maintain its policy is very supportive to keep the supply ship tight through at least July and it also adds to the bullish discourse.

OPEC’s research arm itself sees oil demand increasing towards 97.9 million bpd in the third quarter of 2021, yet the policy-making group of OPEC+ has not yet taken supply action to meet this expectation.

The disconnect between its demand forecast and its supply call raises questions on whether OPEC+ is intentionally firing up prices, or if some of the demand expectations are overstated, particularly on account of aviation demand, which we do not see recovering in the near-term as many international travel restrictions remain firmly in place worldwide.

The market consensus is now focused on the worry that oil demand will outpace supply in the second half of 2021. Certainly, the seasonal summer demand surge is coming, and if OPEC+ doesn’t rise to the occasion and bring more supply on the market, oil prices will continue gains in coming months.    

 On the other side of the sword, oil above $70 per barrel will be a real burden for oil-importing countries, as higher oil prices could stunt economic recovery prospects.

A distinct economic lag in emerging economies after the pandemic could ultimately negatively impact the global overall demand for commodities needed to restart and jumpstart economies, and pose a downside risk to the spectacular oil price gains of the past seven months.

According to our country-level oil demand models, there are still some countries and regions that will not see oil demand levels recover to pre-pandemic levels until 2022, and some are delayed even further out on the timeline.

For now, oil prices are understandably moving with the positive news of the resurgence of oil demand in countries with high vaccine penetration, but the global campaign, and return to normal travel, is still far from mission accomplished. 

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