By Irina Slav
Brent crude briefly hit $70 per barrel and West Texas Intermediate rose above $66 this week as improving economic outlooks for some of the world’s biggest economies boosted optimism.
Although a round of profit-taking by hedge funds limited the upward potential of the benchmarks, it was a temporary occurrence, and the potential remains substantial.
Among the tailwinds spurring crude oil prices higher were the reopening of the UK after months of lockdown, as well as loosening movement restrictions in other parts of Europe as well, which sparked hopes for higher fuels demand as pent-up wanderlust is unleashed.
In the United States, meanwhile, in addition to fuel supply shortages following the Colonial Pipeline cyberattack, airports saw a pick-up in traveler numbers with the Sunday total at 1.8 million—the highest since March last year. United Airlines said summer travel bookings had risen by 214 percent from last year and that it was going to add 400 flights to destinations in Europe for this July.
Meanwhile, hedge funds and other money managers bought the equivalent of 102 million barrels of crude across the six most actively traded contracts in April, and then in the week to May 11, they sold 31 million barrels to take profits, Reuters’ John Kemp said in his regular weekly column. Brent crude and WTI were the most sold contracts.
Still, institutional buyers remain highly optimistic about oil, Kemp noted, with their total positions across the six contracts at 871 million barrels. The bullish to bearish positions ratio stood at about 5:1 as of last week.
Despite the general optimism, however, various causes for concern remain. One of these is inflation, especially in the United States. The generous federal government stimulus measures aimed at kickstarting the pandemic-hit economy are the biggest reason for this worry, as is the fallout of the pandemic. It has involved shortages of various raw materials and other goods that have forced their suppliers to increase prices, fueling worry that the price rise will spread to the end consumer and hurt spending.
At the same time, warnings are beginning to be made, albeit tentatively, about the future of oil supply. Although the dominant opinion remains that demand for oil will start declining before supply, some analysts have been warning that the global oil market could swing into a deficit before too long as investment in new exploration falls under the weight of the latest demand projections and aggressive government policies aiming at reducing greenhouse gas emissions.
Still, sentiment among Big Oil shareholders seems to be leaning towards continued demand for crude, judging by this year’s round of shareholder meetings where a number of climate-related resolutions were tabled but failed to pass as the majority voted against them.
In the short term, meanwhile, supply is likely to increase as soon as this year if Iran and the United States reach an agreement for the U.S.’s return to the so-called Iran nuclear deal or the Joint Comprehensive Plan of Action on the Iranian nuclear program.
The latest reports say talks are going well and a deal was in sight, with Iranian government officials saying the country was ready to ramp up production to 4 million bpd within three months in the most optimistic scenario.
The fact that oil prices are up despite this information suggests that the global oil market has more or less balanced as extra oil in storage has drained largely in tune with the return of demand, and OPEC+ has continued to maintain a cap on production. The cap will be lifted further in the next couple of months, adding more barrels to supply. This will likely test current price levels and either prove or disprove the longevity of current demand trends.