Following an important agreement among the OPEC+ members last month, oil prices have fallen in the last week, dropping by more than 9% since their highest recorded level last July.
Brent closed at $69.76 on Monday while WTI closed at $67.56 with a narrowing spread of $2.20. While the observed path may well be a market correction following a period of significant speculation on demand recovery, the markets now seem to have realized the potential impact of the delta variant of COVID-19 on global oil markets. Furthermore, the Chinese PMI (which is considered an effective indicator of business and economic conditions in the country) has been declining over the past three months, from 51 in May to 50.9 in June and 50.4 in July, and it is expected to decline even further in August leading to an expected decline in demand by one million bpd as estimated by Goldman Sachs.
IEA raises concerns about delta-covid-19
Despite the fact that OPEC has kept its demand forecast for 2021 unchanged from the previous month at 96.6 million bpd, it has slashed its demand forecast by 1.1 million bpd for 2022 to stand at 99.9 million bpd, up by 3.3 million bpd y/y. The IEA report, on the other hand, is sending a warning signal that growth in demand may slow in the remaining period of 2021 and OPEC+ needs to take a more cautious path towards its policy in 2021.
The next OPEC+ meeting is scheduled to take place next month and the key question here is whether the alliance will consider recent calls from the White House to bring back supply sooner than the group had originally agreed on. Under the current plan, the group will end its supply cuts by September 2022. According to S&P Platts, the production of OPEC+ rose by 750,000 bpd m/m standing at 40.21 million bpd, with 510,000 bpd produced by Saudi Arabia.
The US may have reached its peak demand for this year
Crude oil inventories in the U.S. continue to fall, albeit at a slower rate, and last week they were reported to stand at 438.8 million barrels, much lower than their levels in 2019 (455.9 million barrels) and slightly above their levels in 2018 (411.1 million barrels). The U.S. oil production has had a moderate growth rising by 100,000 bpd w/w to stand at 11.30 million bpd. It is now evident that the growth in U.S. oil production has been halted not only by the changing strategy of investors but also by the green agenda adopted by the new U.S. administration. Oil demand in the U.S. has also started to slow, particularly for gasoline and jet fuels which both declined by 345,000 bpd and 367,000 bpd w/w, respectively, according to the EIA.
Some might think that OPEC+ has mistimed the tapering off of its production cuts, but it is important to remember that OPEC+ is already working hard to counter the impact of Covid-19 on oil markets by planning to ramp up its output over the next 12 months. It is the approach of OPEC+ so far that has prevented oil prices from soaring above $77, with many investment banks having predicted higher than $80 oil in the summer. Under the current circumstances, it is unlikely that such prices will be seen in 2021.
OPEC+ not likely to accelerate ramping up output
According to Reuters, OPEC+ has no intention of easing its production cuts further following the White House’ calls on the alliance to ramp up its output faster than previously planned. Biden’s desire for low retail gasoline prices is not currently an OPEC+ priority. The alliance is unlikely to respond to such calls for two reasons (i) gasoline demand normally peaks in the summer period, which means prices will likely fall soon. Summer demand has been largely responsible for the price rally seen between June and August. Growth in demand will likely slow in the remaining part of 2021, which would mean prices reached their highest levels in July. (ii) The impact of the Delta variant is an issue of significant uncertainty. Continued lockdown measures and restriction of travel in China are especially worrying and it raises questions about the efficacy of vaccines against the delta variant. In this case, a third dose may be required. This demand is likely to be a serious issue of concern for OPEC+ in its September meeting and could lead the group to delay or slow ramping up output in case the situation in China continues to deteriorate.