The two leading crude markers notched their first monthly loss since March, but it could have been far worse. August was noteworthy for its volatility due to a surge in Covid-19 cases. After taking a beating in the middle of the month, Brent made a swift return above $70/bbl last week. The energy complex is back on the upswing and may be primed for a sustained rally. Indeed, those betting on $80/bbl oil by the year-end are sticking to their bullish forecasts. Yet not everyone is confident of a significant rise in crude prices over the final third of the year. In the latest Reuters oil price poll, analysts trimmed their 2021 Brent price forecast for the first time since November 2020.
Either way, the next price catalyst will likely be today’s OPEC+ meeting. This is the first gathering since the alliance agreed to increase output by 400,000 bpd each month from August onwards. As they prepare to discuss supply policy, one foregone conclusion is that they will not add additional barrels as per Washington’s recent request. Nor will they press the pause button on easing supply curbs. Although comments have emerged that the group may reconsider their decision to taper supply cuts given the recent outbreak in global Delta cases, this is highly unlikely. OPEC’s latest Monthly Oil Market Report downplayed the impact of rising cases, so much so that it left its oil demand estimate for 4Q21 unchanged. What’s more, OPEC’s own data suggests that the oil market will face a deficit until the end of this year. In short, there is no reason to think it will rock the boat when it comes to its production strategy.
OPEC and its partners will stick to their current timetable for increasing oil production. All the while, the prospect of Iranian oil returning to the market has become more distant as efforts to reach a breakthrough have stalled. Negotiations between Washington and the new Iranian administration have yet to resume. At the same time, the outlook for non-OPEC+ supply over the remainder of the year is fairly subdued. The upshot is that OPEC+ holds all the cards when it comes to supply side of the oil equation and under their guidance, supply considerations should remain supportive.
With regards to the demand front, the outlook is improving with the market more confident in a near-term recovery. According to the three leading energy agencies, global oil demand is now seen rising by 1.4 mbpd on average to 99.6 mbpd in 4Q21, compared to the previous quarter. Meanwhile, OPEC+ is poised to boost supply by 1.2 mbpd in the final three months of the year. In other words, demand for oil will increase by more than OPEC+ is raising its output over the coming months. This should safeguard the crude deficit in the year-end period, which in turn will add to upward pressure on prices.
Demand sentiment may be on the mend but remains at the mercy of the Covid-19 pandemic. To say that the pandemic has been brought under control would be far from the truth. Although China has quelled its recent outbreak, other nations continue to do battle with rising cases. Uncertainty over the spread of the delta variant will therefore continue to be prominent theme over the comings months even alongside rising vaccination rates.
Staying on the topic of demand considerations, market players will also have to be mindful about currency moves. Fed policymakers are widely expected announce plans to taper its stimulus programme later this month. Jerome Powell did suggest that tapering could come later this year, but he also made it clear that interest rate hikes are still a long way off. Even so, this should set the stage for the greenback to gain further ground against its international peers, which in turn may act as a brake on oil consumption.
Despite the downside risks on the oil demand front, they are not currently threatening the current market deficit. Commercial oil inventories in OECD countries should therefore continue to trend below their 2015-2019 average. Simply put, prevailing conditions favour the oil markets going higher in the final quarter of this year. Beyond here, however, the glut alarm bells are ringing loudly. According to OPEC data, the oil market will flip into a surplus in 2022 as the OPEC+ alliance raises production. Oil bulls should make hay while the sun shines because a cooldown is almost certainly coming.