Oil prices finished yesterday largely flat as the Covid-19 football match went into extra time. A spate of fresh outbreaks of the Delta variant across the Asia-Pacific region provided a stark reminder that it is too early to declare victory against the virus. Several countries are battling to contain the spread of the variant, which in turn is casting a shadow on the fuel demand outlook. Echoing this sentiment was the OPEC Secretary-General Mohammad Barkindo. He reportedly told a meeting of the Joint Technical Committee (JTC) of OPEC that coronavirus variants are posing a risk to the demand recovery. That being said, the JTC kept its 2021 global oil demand growth estimate at 6 mbpd, according to sources.

All the while, a dose of dollar strength also weighed on the energy complex. The US currency was buoyed by a string of upbeat macro data pointing to a solid economic recovery. Figures showed US house prices rose at their fastest rate in at least 30 years in April. This was followed by a gauge of US consumer confidence which improved for the fifth consecutive month in June to its highest level since the COVID-19 pandemic began. Investors will now be looking ahead to Friday’s non-farm payroll report which is expected to show a pick-up in the pace of hiring.

In the meantime, the oil market will take its cues from today’s US stock report before turning its attention to tomorrow’s crunch OPEC+ meeting. Overnight, the API reported that US crude stocks fell by a bigger-than-expected 8.2 million bbls. In contrast, gasoline and distillate fuel inventories rose by 2.4 million bbls and 428,000 bbls, respectively.

Saudi Arabia at the wheel

 Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, has not shied away from giving short-sellers a piece of his mind. In fact, he famously cautioned them last year not to bet against him. He went on to promise those who gamble on the oil price would be hurt “like hell”. More recently, to those who want to short the oil market, Prince Abdulaziz bin Salman had the following warning: “Make my day”.

Unsurprisingly, speculators have taken heed of this flurry of sharp-tongued admonitions. Bullish bets on oil have steadily increased since the Saudi Energy Minister threw down the gauntlet back in September. Money managers’ net-long position on traded WTI and Brent oil futures and options contracts have steadily risen from 390 million bbls in mid-September to 737 million bbls in the week ended June 22, according to CFTC and ICE. This represents a nominal value of $54 billion.

This bullish positioning of hedge funds over the past nine months is not without reason. Brent has spiralled up from $40 per barrel in September to above $75 in mid-June, the highest level since late 2018. Prices have been lifted as global oil demand recouped most losses from 2020 from reopening economies over recent months and major exporters exercised restraint in lifting oil output. This, in turn, has helped drain the massive glut that built up through last year’s lockdowns. Preliminary May data showed inventories in OECD industrialised economies falling below the 2015-2019 level, according to OPEC.

All this provides vindication for Saudi Arabia’s cautious approach to restoring supplies. The OPEC kingpin has been accused of being too guarded, but its strategy has thus far been spot on. It has managed to restore the oil balance without over-tightening the market. Saudi caution is therefore likely to feature once again when the OPEC+ producer group meets tomorrow to decide on August production levels. And rightly so. After all, the latest outbreak of the Delta variant has highlighted the fragility of the oil demand recovery.

Consequently, market watchers believe that the group will not rush the easing with a large number. Expectations are for an increase of around 500,000 bpd in August. Yet this is just a quarter of the expected supply deficit in August, according to estimates from OPEC+ itself. The global oil market is calling out for a substantial increase in supplies, but the Saudis are unlikely to oblige. A smaller than expected return of oil should ensure that the market continues to draw down inventories over 2H21. But just as importantly, it also leaves the market in no doubt that the OPEC+ alliance, or better said Saudi Arabia, has full control of the oil market.