By Irina Slav
The latest resurgence of the coronavirus that last year virtually shut down most of the world has considerably clouded the previously bright outlook for crude oil demand, driving prices down at the start of the week and capping gains made earlier today.
The latest Covid-19 wave prompted movement restrictions in China plus the partial closure of some of the world’s busiest ports there, which also happen to be major oil hubs. This has cast a shadow on the immediate prospect for demand from the world’s top importer. Meanwhile, infection numbers are soaring in the world’s top consumer, the United States, adding fuel to demand worries.
Hedge fund behavior confirms the bearishness. Reuters’ John Kemp reported that hedge funds were net sellers of oil futures last week, making it the sixth of the last eight weeks with net sales in the six most traded futures contracts. For the week, funds sold the equivalent of 64 million barrels of crude. For the six-week stretch, sales equaled 213 million barrels, with most of this in crude oil—183 million barrels—and the remainder in fuels.
At the same time, bargain hunters have emerged, adding upward pressure to oil benchmarks, Reuters reported earlier today. This was accompanied by expectations that OPEC+ would not be adding more barrels to its production anytime soon, despite calls from the U.S. to that effect.
Indeed unnamed sources from the extended cartel told Reuters on Monday that OPEC+ felt no need to boost production by more than it had already agreed, which was 400,000 bpd from this month onwards until pre-pandemic production levels are reached.
The sources noted OPEC+ members did not expect a shortfall of supply with the scheduled output additions, especially in light of the latest fundamentals data from both OPEC itself and the International Energy Agency. Indeed, the IEA said last week the latest surge in Covid-19 infections had hit the brakes on oil demand recovery and was reversing its direction.
“Global oil demand surged by 3.8 mb/d month-on-month in June, led by increased mobility in North America and Europe,” the IEA said in its latest Oil Market Report. “However, demand growth abruptly reversed course in July and the outlook for the remainder of 2021 has been downgraded due to the worsening progression of the pandemic and revisions to historical data.”
Adding further pressure on prices was the Energy Information Administration’s latest Drilling Productivity Report, released Monday. The report showed the EIA expected U.S. shale oil production to inch closer to 8.1 million bpd next month, which would be the highest since May last year. Although the monthly increase from August would be just 45,000 bpd, any increase right now would be coming at the wrong time.
On the flip side, at least according to IEA data, global oil stocks have been draining, with OECD stocks 131 million barrels below the five-year average as of June. While this could lend some support to oil bulls, the outlook for 2022 is for a surplus and although IEA forecasts as any other forecasts should be taken with a pinch of salt, the combination of OPEC+ output additions and rising Covid-19 case numbers is hardly bullish.
Be that as it may, trends from earlier this year showed just how quickly and strongly oil demand can recover on a global scale. The rebound was so strong it devastated forecasts for a prolonged oil price depression and quickly had analysts talking about Brent at $80 a barrel. This suggests it could happen again once cases start going down. In the meantime, the upward potential of benchmarks would likely remain constrained, even with the newly elevated geopolitical risk in the Middle East following Afghanistan’s takeover by the Taliban.