These days there is no keeping Iran out of the headlines. Yesterday, Iranian-backed forces were suspected of being behind the seizure of a tanker off the coast of the UAE. Tehran strongly denied any involvement, even though the vessel has since been ordered to sail to Iran. The latest incident followed an attack last week on an Israeli-managed tanker off the Omani coast that killed two crew members, which the West blamed on Iran.
Amid this tense backdrop, Iran’s ultra-conservative president-elect Ebrahim Raise was credentialed by the country’s supreme leader ahead of tomorrow’s parliamentary inauguration. Among the items high on his agenda will be talks aimed at reviving the nuclear deal from which the United States withdrew unilaterally in 2018. Raisi declared yesterday his government will take steps to lift the “tyrannical” sanctions imposed by the United States.
The latest uptick in geopolitical tensions across the region failed to lend any price support. Instead, fears over rising cases of the Delta coronavirus variant continued to put a downer on prices. Brent and WTI swung between positive and negative territory on Tuesday, at one point failing 3% before staging a late recovery to finish the session around 1% lower.
Those looking for the next oil price catalyst need look no further than today’s EIA stock report. In recent weeks, oil bulls have drawn support from US inventory dynamics, with commercial stocks falling to their lowest since January 2020 and indications that the tightening is set to continue. Overnight, the API reported that US crude stocks fell by a smaller-than-expected 879,000 bbls last week. Gasoline inventories dropped by a hefty 5.8 million bbls while distillate fuel stockpiles shrank by 717,000 bbls.
Higher, but only just
It may still be early days yet, but August is turning into a lively affair for the oil market. Two sessions in and the leading crude markers have already shed almost 5%. That being said, oil is far from being out of favour. Brent and WTI are still holding above $70/bbl, albeit only just. What’s more, there is a growing consensus that global oil prices will edge higher over the coming months with demand surging ahead and global supply in catch-up mode. This has motivated a flurry of upward oil price revisions by market watchers. In the latest Reuters price poll, analysts upped their average 2021 Brent price forecast to $68.76/bbl from a previous estimate of $67.48/bbl. The European crude benchmark has so far averaged around $66.50/bbl this year.
In short, current price projections point to modest oil price growth. Crucially, they suggest that oil prices will not rally significantly from current levels. Better said, oil analysts and economists believe that $70/bbl is a more realistic outlook for Brent crude prices for the rest of the year than $80 oil. In the eventuality that Brent tops $80, it sure as hell won’t spend much time above this price threshold. Currently, the energy complex is “buy on the dips” and “sell on the rise” type of market. This should keep oil prices pinned in the $70-$80 range over the remainder of the year.
At the heart of this guarded oil price outlook are persistent Covid-19 headwinds. The Delta variant continues to spread aggressively in different parts of the world and is interrupting economic reopening efforts, especially in parts of Asia. Top-of-mind for the oil market is China. The world largest oil importer is experiencing its worst Covid outbreak in months. The Delta variant has spread to 32 Chinese provinces within the last two weeks. The risk is that it will eventually dent oil demand in the world’s leading growth centre.
For all of these virus-induced demand worries, the majority of market players are still putting their faith in what is the biggest vaccination campaign in history. More than 4.16 billion doses have been administered across 180 countries, according to data collected by Bloomberg. However, the distribution has been lopsided. Bloomberg notes that countries and regions with the highest incomes are getting vaccinated more than 30 times faster than those with the lowest. What is more, at the current pace of 42 million a day, it will take another six months to cover 75% of the global population. This gives the Delta variant an extended window to undermine economic activity and hence oil consumption.
As things stand, current lofty oil demand forecasts for the remainder of 2021 don’t reflect the evolving Covid situation. This sentiment will most likely be echoed by the EIA/IEA/OPEC triumvirate when they release their updated demand forecasts next week.
Meanwhile, on the supply front, the market will be watching the new Iranian president Ebrahim Raisi taking office this week and the potential implications for the nuclear talks. Up until now, the prospect of a new nuclear deal and the subsequent incremental return of barrels from the OPEC nation was a distinct possibility. Yet Iran’s increasingly aggressive actions in the Middle East will not do its ambitions to secure sanctions relief any favours. That being said, Iran’s incoming president has made it clear that it will take steps to lift sanctions imposed by the US. A more conciliatory approach from the pariah nation may therefore be on the horizon. In any case, it would be unwise to write-off the unrestricted return of Iranian barrels. The Iranian wildcard together with the resurgence in Covid variants should keep upside potential in check for the rest of the year.