At first sight the latest weekly EIA stock data was a non-event but scratching the surface reveals encouraging signs. To begin with, refiners have recovered from the Arctic blast. Nationwide utilization rates rose to 83.9%, the highest since last March. Runs in the USGC reached 83.1%, just shy of the pre-storm level. The increased crude oil input into refineries coupled with the unchanged 11 mbd domestic production and the rise to 3.2 mbpd in gross crude oil exports led to a slight depletion in crude oil inventories compared to the 3.9 million bbls increase seen by the API.

As the end of the winter period is fast approaching the 2.5 million bbls build in distillate stocks probably did not come as a surprise but to see gasoline stocks drawing by 1.7 million bbls must have been refreshing. This depletion was coupled with an increase of 300,000 bpd in consumption and the gasoline picture looks rosy. Add to that the total US product demand broke the 20 mbpd barrier and adding a bullish spin to the latest set of data looked justified.

The market, however, decided to focus on the usual suspect with a little bit of help from OPEC. Vaccine roll-out in Europe is now a never-ending story and the relentless rise in infection rates constantly unnerves oil bulls. In the latest twist French President Emmanuel Macron ordered the third national lockdown and closed schools for three weeks to alleviate the pressure on hospitals amidst rising infections. It is no coincidence that the Joint Technical Committee of the OPEC+ group has cut its 2021 oil demand growth forecast by 300,000 bpd pointing to “fragile market conditions”. Global supply growth has been raised by 200,000 bpd and consequently reaching the ultimate target of matching the 5-year average of OECD stock levels has been pushed out by one month. A definite sign that the market is now getting sceptical of immediate demand recovery is the sudden collapse of Brent spreads. The June/September differential, for example, dropped 27 cents/bbl yesterday. The Promised Land is not as close as believed a month ago.

Positive 1Q with negative ending

Looking at the settlement prices the first quarter of 2021 was positive. Risky assets had a good three months with the two main crude oil futures contracts gaining 22% (WTI) and 33% (Brent) year-to-date. The MSCI Global Equity Index returned more than 4%% in 1Q 2021. The S&P 500 Index flirted with the 4,000 points barrier and it only seems to be the question of time to overcome this hurdle. The latest move higher, which started in November seemingly continued unabated.

This confidence, however, was somewhat dented in March. Present day realities have overtaken the steering wheel from the bright futures. Whilst equities held up relatively well, oil consolidated last months as worries about global demand recovery gained traction. Simply put, slow roll-out of inoculation programmes, vaccine nationalism and the continuous rise in infections in Europe, India and Brazil (and now possibly in the US) are forming the biggest obstacles that stand between current and higher oil prices. Daily cases peaked over 650,000 globally last month, just slightly below the levels seen last December. Unless there is a significant improvement in containing the disease investors are likely to remain cautious.

Regional differences in handling the pandemic also had a negative impact on oil prices towards the end of the quarter. It came in the form of the strong dollar as the expected economic growth in the US (this year’s expansion has been upped from 4.2% to 6.5% by the Fed) easily beats the outlook in the eurozone, which is at 3.9%. Little wonder then, that the dollar index finished the quarter 3.7% up from 4Q 2020.

Brighter US economic prospects brought a wind of caution with them. The same way as dismal economic data supports financial markets because of central interventions, good news -healthy growth, falling unemployment and rising consumer spending- are causing concerns as it was laid bare last month when the fear of inflation sent US Treasury yields skyrocketing. The maraschino cherry on this colourful bearish cocktail was the revival of Iranian crude oil exports to China at, possibly, destressed prices. According to Refinitiv Oil Research the world’s second biggest economy has acquired around 1 mbpd of disguised Iranian crude in March, something that will surely be hotly debated today within the OPEC+ group.

Despite the consolidation phase experienced last month our often-expressed view has not changed. The groundwork for tighter oil balance, depleting oils stocks and consequently higher prices have been gradually laid down over the past 5-6 months and once infection rates start falling globally, investors will react. The year kicked of with the Democrats winning majority in both chambers of the US Congress. This provided invaluable help for them to push through the $1.9 trillion Covid package that will, in return, support the country’s economy. This blue wave also makes the planned $3 trillion infrastructure project ever more plausible increasing demand for raw materials.

To varying extents global oil demand is set to grow every quarter this year. There is actually a consensus between the three main forecasting agencies that the 2021 demand growth will be around 5.4-5.8 mbpd. When it is coupled with disciplined OPEC+ supply management the net result is stock depletion. From this respect the past could well be indicative to future performance; we will find it out today. OPEC and its allies have come a long way to reduce OECD inventories from over 3.2 billion bbls in 2Q 2020 close to 2.9 billion bbls last quarter. Mother Nature has also been on their side as an exceptionally cold winter on the Northern Hemisphere in general and in Texas in particular gave a helping hand in drawing on product stocks. As a proxy for OECD stock movements, total industry stocks in the US fell 53 million bbls in 1Q with both gasoline and distillate inventories declining.

Last but not least, geopolitical developments must also be mentioned as the occasional price driver in the past three months. Although oil supply has not been disrupted, the frequent Houthi attacks on Saudi Arabia and the consequent retaliatory measures serve us with a reminder that despite the Saudi peace offering the Middle East will always be a reliable source of a few dollars of geopolitical risk premium. The past quarter did nothing to hinder the optimism going forward. Oil price recovery might have taken a well-deserved breather in March but if confidence in winning the battle against Covid remains healthy the second half of 2021 will bring joy for oil bulls.