Oil makes a comeback as demand rises

Oil makes a comeback as demand rises

  • Oil consumption is likely to rise amid a stronger outlook for the United States, China, and Europe.
  • OPEC+ eases limit on output, betting the world will need more oil as mobility restrictions ease.
  • As Iran boosts oil supply amid nuclear deal talks, markets worry it could depress prices.

Oil prices have gained on strong global economic activity, a rebound in demand, and a weak U.S. dollar. Brent crude futures, the benchmark in energy markets, have recently traded above $70 a barrel from a low of around $9 in April 2020. Futures for West Texas Intermediate (WTI), the U.S. benchmark, surpassed $67 a barrel after collapsing below $0 last year.

Oil’s lull lifted by expanding economies

As risk appetite rallied in April, so did the crude markets. But gains were tempered by growing concerns about demand and renewed virus outbreaks in emerging markets, especially in India and Brazil. India is a major crude importer.

Even so, demand for fuel has increased in the United States, and it is expected to rise further in coming months as states reopen. We also expect demand in Europe to accelerate, with the normalization of life in the summer, unless there is another major setback in vaccination efforts. We forecast the largest-ever jump in crude demand over the next three-to-six months, as the United States, Europe, and China – the world’s biggest fuel consumers — continue to grow.

labor market data

OPEC+ keeps plan to ease output cuts

The OPEC+ alliance led by Saudi Arabia and Russia in April agreed to boost output from May to July. The group continues to monitor market conditions, including new waves of Covid-19 outbreaks, and is likely to step in to contain any unexpected price declines. Russian Deputy Prime Minister Alexander Novak indicated in April that the cartel was comfortable with the anticipated supply and demand balance until the end of 2021.

We expect stockpile drawdowns to accelerate if OPEC+ production increases remain contained even amid the vaccination-driven demand surge. The combination of a small increase in production and a normalization in inventories can reduce the tensions within the group. Shale producers in the United States have stayed on the sidelines so far. We don’t forecast a material growth in U.S. production until the last quarter of 2021. This sets quite a bullish backdrop for oil commodities.

Oil is perhaps the most likely commodity to benefit from the rebound in the global services sector. Fuel demand is expected to surge as travel and transportation pick up. While financial markets may have priced in positive developments from the reopenings, the commodities market needs to clear in physical markets, and hence, prices may not yet reflect future activities. If the demand recovery comes in line with expectations, oil prices may be more supported relative to financial assets.

Iran talks and the future of oil

Against this backdrop, Iran has become a supply concern. Iran has already increased exports to China at discounted prices, despite ongoing U.S. sanctions. The risk is that Iranian oil may return to global markets sooner than expected and, hence, depress prices.

There have been recent preliminary and indirect talks between the United States and Iran to revive the 2015 nuclear agreement. These are aimed at persuading Iran to scale back its nuclear program and for the United States to lift restrictions. It is possible that an interim agreement could allow for small volumes of Iranian oil into the market.


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