Despite the significant rally in oil over the past couple of weeks, demand uncertainty continues to affect prices. The outbreak of the second wave of a new Covid-19 strain in India has particularly left the markets concerned about fuel demand in the world’s 3rd largest oil consumer.
According to Indian state-owned refiner, Bharat Petroleum, overall fuel demand in India is now estimated to have dropped by about 7% from pre-covid levels in April 2019. Furthermore, refineries have postponed maintenance plans, which has disrupted refinery runs in many regions around the country.
Nonetheless, prices continued their way upward despite the unprecedented health crisis in India, which currently reports more than 400,000 new cases per day, not including cases that haven’t been reported.
Yet, very recently, some investment banks have predicted that crude oil prices could hit $80-$85 in the second half of this year, as Europe, and many other regions, emerge out of lockdowns and as intercontinental aviation starts to pick up gain. Furthermore, the Biden Administration’s COVID recovery agenda and ongoing concerns of an inflation bubble may support this price outlook as the US Federal Reserve maintains its policy of near-zero interest rates. It is worth noting that crude markets are more driven by optimism than by fundamentals.
There are several reasons why prices may not go much higher than their current levels.
Firstly, even with the resumption of international aviation activity, oil demand is not expected to reach its pre-pandemic levels this year, and in our own estimates it will take until 2023 to reach the 2019 demand level of around 100 million bpd. This is also predicted by the IEA, and the IATA which see international aviation movements to return to 2019 levels by mid-2023.
The continued rise in prices may affect a fragile demand recovery
One of the major threats to crude markets is that the continued rise in prices may start to affect global oil demand and stimulate more supply from non-OPEC countries, especially from the United States. Currently, oil production in the U.S. has been stagnant throughout the year at 10.90 – 11 million bpd, yet the number of oil rigs rose to around 342 rigs last week, suggesting a cautious uptick in drilling activity. Yet a, further rise in prices will certainly entice shale oil producers in the U.S. to ramp up their production. Last week, the EIA crude inventory report offered a bullish picture to the markets, showing that US oil stocks only increased by 100,000 barrels, while commercial stocks currently stand at 493.1 million barrels. Oil production declined by 100,000 bpd w/w to 10.9 million bpd while net imports increased by 1.2 million bpd, and refinery throughput increased by 253,000 bpd to 15.02 million bpd. Petroleum product demand rose by 1.63 million bpd reaching 20.40 million bpd which puts the US oil demand back to its pre-pandemic levels.
OPEC+ which is currently withholding around 6.5 million bpd will start to bring back withheld barrels to increase revenues, which may put a limit on the level to which prices will continue to rise. Over the next three months, the group is expected to bring back 2.1 million bpd.
Iran aims to export 2.5 million bpd after U.S. sanctions are lifted
Additional supplies are also expected to come from Libya, which is expected stabilize its oil exports, and from Iran which is currently re-negotiating a nuclear deal with Western powers. In case of a diplomatic deal between Iran and Western powers and its GCC neighbours, the country may decide to increase its oil exports officially. Recent statements from Iranian officials predict a rise in crude exports by around 2.5 million bpd in case of lifting sanctions.