Another day, another set of impressive US economic data. Yesterday’s docket of economic news was dominated by US GDP data for the first quarter of 2021. Figures showed US growth gathered pace after expanding at a 6.4% annualised rate last quarter, up from 4.3% in 4Q20. The world’s biggest economy is showing strong momentum as it reaps the benefits of government stimulus efforts and a rapid Covid-19 vaccination program. This pick-up in economic activity should bode well for hiring. And sure enough, separate data revealed that US jobless claims fell to a pandemic low for a third consecutive week. Hopes are now running high that this encouraging trend will continue over the coming months.
The latest instalment of robust US economic data helped push major US stock indices to fresh closing peaks. Shares also enjoyed a tailwind following blowout earnings from April and Facebook. The upbeat mood spilt over onto the oil market. The two leading crude markers tacked on more than $1/bbl to finish at fresh six-week highs. A weaker dollar coupled with increasingly bullish expectations for the post-pandemic recovery made for a positive backdrop. However, amid the supportive narrative came a fresh warning that the strong recovery in oil demand that we have seen recently may stall out before too long. Oil consultancy Rystad Energy warned that India’s Covid-19 crisis may lead to an oil supply glut. This shocking prediction fell on deaf ears, for now anyway. Nevertheless, it suggests that the Covid clouds are far from parting over the energy complex.
Sell in May and go away?
A newfound bullishness is returning to the markets. Brent and WTI are starting to show upside potential having been stuck in a range for much of this month. The price action over the past week suggests investors are buying into confidence shown by OPEC+ in a solid recovery in global fuel demand. The key question now is how much of this optimism is already baked into prices. This is especially pertinent as we approach that time of the year when the old adage of “sell in May and go away” comes to mind.
Whether oil prices move higher over the summer months will ultimately depend on two key factors: the global pandemic and OPEC+ production. The former remains, by far, the biggest wildcard in the short-term oil price outlook. Worries over the global demand recovery are returning to the fore as coronavirus numbers increase around the world. Nowhere is this more evident than in India. Demand for fuel in the world’s third-largest oil importer is crashing amid record new daily Covid cases. The rumour mill is now in full swing that India’s oil demand could drop by close to 1 mbpd in May. Even this lofty number could prove conservative if the country is forced back into a nationwide lockdown. Either way, there is not likely to be a quick solution to the coronavirus problems in India. Consequently, it will continue to act as a drag on global demand recovery in the short-term, which in turn should cap price gains.
Mercifully, India’s Covid woes are the exception rather than the rule. Other countries currently battling a fresh wave of infections such as Brazil and Japan will avoid slipping into India’s dire situation. This should provide some relief to the near-term demand recovery. What’s more, the demand outlook in other parts of the world is starting to show some promise. A case in point is Europe. After a painfully slow start, beset by supply shortages and a lack of flexibility, Europe has finally turned a corner on its vaccine rollouts. Restrictions are expected to be lifted over the coming weeks thereby raising the prospect of summer holidays on the Continent for million this year. Needless to say, this will provide a much-needed boon for fuel demand. Meanwhile, in the US, product demand is close to normalising. Latest EIA data revealed US fuel demand in the week to April 26 was on par with the same period in 2019.
Overall, global oil demand is increasing. But so is supply. OPEC+ is poised to bring back about 2 mbpd of production over the next three months. Under the agreement, the producer group will increase production by 350,000 bpd in both May and June and by 441,000 bpd in July. Over the same period, Saudi Arabia will gradually unwind additional cuts of 1 mbpd that it has been making voluntarily. The phased easing of OPEC+ supply curbs will coincide with pockets of demand weakness in Asia and Latin America. Even so, this incoming wave of supply is unlikely to risk upsetting prices. This is because demand growth elsewhere is set to surge. At the same time, output from the US, Iran and Venezuela is unlikely to see a marked increase in the upcoming months. A supply deficit will therefore persist over the summer thereby paving the way for large stock draws. In short, despite the old adage, the near-term outlook is still bullish for oil.