by Louise Dickson:
There is plenty of bullish confidence in the oil market currently and oil prices start the week with gains. Trading excitement often drives the market just before OPEC+ meetings, and there is confidence that the oil producer group will demonstrate supply restraint at its meeting today
Moreover, the recovery of oil demand appears to be on track at a global level, which lends extra support to prices and for now makes up for any potential downside stemming from the Iran nuclear deal negotiations.
Nevertheless, a final decision in Vienna this week could bring some downward turbulence to oil prices but the impact should be mild as the oil market has had months to gradually start to price in the probability of an earlier return of Iranian oil supply to the market.
In our base case, we expect Iranian oil (crude and condensate) supply will reach 3.3 million bpd by the end of 2021, and tick towards 4 million bpd in the first half of 2022.
An earlier-than-expected return of Iranian barrels would see an acceleration towards these milestones, with perhaps as much as 1 million bpd returning over a 4-month period.
If this early Iran barrel scenario were to materialize, the market would be able to absorb the mini supply shock as economies pull out from lockdown and oil demand normalizes.
An early Iran deal would therefore not disrupt the bullish cycle we anticipate for the remainder of the year but would be a bump in the road.
The eventual upshot in oil demand will yield the way for more oil supply to return to the market.
The planned additional 2 million bpd of supply from OPEC+ by July 2021 will still not be enough to meet our forecasted demand uptick, therefore there could be a “call” on the group to produce more, especially in the peak demand month of August.
OPEC+ will likely hold steady at tomorrow’s meeting, waiting to receive more clarity over the potential Iran deal, and instead make more bullish supply revisions to their program at the group’s following get-together.
Looking at fundamentals the market is now facing the exact opposite dilemma of April 2020. Instead of a spiraling downwards demand shock that forced upstream shut-ins, producers now have just as delicate of a task to bring back enough supply to match the swiftly rising oil demand.
A failure to keep up with oil demand would overheat an already tight oil market, and cause a very volatile upward price gyration.
Rystad Energy sees global oil demand currently at 91.8 million bpd, but there is potential to soar toward 98 million bpd by the end of the year.
However, the oil demand recovery is choppy, and regional cracks are beginning to show as some countries open fully and others battle second and third waves of Covid-19.
In terms of demand recovery, the US continues to surprise to the upside. Vaccinations and eased travel restrictions and reactivating both road and aviation activity quickly.
In the US, road traffic has recovered to nearly 93% of pre-pandemic levels, and aviation activity has improved to 67% of 2019 levels, a strong increase from the 60% level observed at the beginning of May.
On the other side of the coin, many Asia countries are seeing oil demand plummet as devastatingly high case numbers have forced countries into lockdown-like conditions.
India, Indonesia, Malaysia, Thailand, Vietnam, and Japan are seeing new movement restrictions weigh on domestic oil demand.
