Brent and WTI surged by more than $2/bbl to fresh three-year highs yesterday as the market waited for a decision from OPEC+ on future production levels. Oil bulls lapped up rumours that the producer alliance was close to agreeing on a deal to ease supply cuts by around 2 mbpd between August and December. Prices, however, pulled back from earlier highs after talks were adjourned for a day. Sources close to the group hinted that resistance from the UAE was standing in the way of a deal.

Yet this hiccup will not change the inevitable. OPEC+ will relax their production curbs by raising oil output in August. After all, the best time to release additional oil on the market is when you have strong demand growth. And oil consumption in the second half of this year is expected to be 5 mbpd higher than in the first six months of 2021, according to OPEC’s own estimates. What’s more, the group’s data show oil inventories are back down to 2015-2019 average levels as a strong revival in fuel consumption continues.

As much as conditions are ripe for OPEC+ to unwind supply cuts, restraint will be a prominent theme when it comes to opening the taps. This is because downside risks remain to global demand growth. Indeed, the continued recovery of oil demand faces an uncertain path as the feared Delta coronavirus variant is spreading, including in countries with high inoculation levels. In other words, OPEC+ will slowly return supply over the coming months, which in turn will safeguard the depletion in global oil stocks. This go-slow approach should keep oil prices on an upward trajectory.

Moving away from oil, it was business as usual on Wall Street as the S&P 500 extended its winning streak. The leading US stock index notched a sixth consecutive record close as investors cheered robust macro data. US manufacturing sector saw the joint-fastest improvement in conditions on record during June. Meanwhile, the latest weekly US jobless claims fell to a new pandemic low. All eyes will now be on today’s non-farm payroll report for confirmation that the US economic recovery is on solid ground.

A false dawn

 The US is undergoing a revival in crude exports. After falling below 3 mbpd in February and March, shipments rebounded to a four-month high of 3.283 mbpd in April, according to EIA monthly data released earlier this week. Meanwhile, latest available weekly EIA data showed that US crude exports over the four-week period ended on June 25 rose 292,000 bpd on the week to 3.546 mbpd, the highest four-week moving average reported by the EIA since the period ended on April 3, 2020.

While exports in recent weeks have remained at elevated levels, sources have noted that as we move into July and August, flows could wane as weakening crude export economics take their toll. The discount for US oil futures to Brent futures has shrunk below $2/bbl in recent days, its smallest since late last year. Furthermore, WTI prices have risen to exceed the Oman Middle East benchmark, effectively closing the arbitrage to ship US crude to Asia.

The overall strengthening of WTI relative to other benchmarks can be largely attributed to the tightening US crude balance. According to the latest EIA data, US crude stocks fell for the sixth straight week in the seven days to 25 June, declining by about 7 million barrels to 452 million barrels, the lowest level since March 2020. This drawdown came as a result of increased domestic refining activity. US refiners have boosted utilisation rates to pre-pandemic levels, with overall capacity use hitting 92.9% in the most recent week, the Energy Information Administration said. That is the highest since January 2020 and reflects a sharp rebound in fuel demand. Refiners have ramped up output in response to rising demand. Fuel supplied hit a post-pandemic high of almost 21 mbpd in the latest week.

This trend of declining US crude inventories is expected to endure as demand edges higher over the summer months and near-term US crude growth prospects continue to show little promise. Needless to say, this will continue to provide an important pillar of price support to the WTI crude complex, much to detriment of US crude exports. And then there is the issue of softening foreign demand. The bulk of US crude shipments are destined to the Asia-Pacific region which is currently battling several outbreaks of the new Delta coronavirus variant. This could lead to impending weakness among Asian refiners as new mobility restrictions crimp fuel demand. All things considered, crude exports from the US are facing a tough summer, with low freight rates not enough to counter worsening arbitrage economics. As a result, the recent recovery in the US crude export machine will most likely prove to be a false dawn.