The pessimism that has gripped the global oil market for weeks as traders suspect weakening demand growth this week began to dissipate, replaced by signs of emerging optimism. All because OPEC repeated what it had said at its June 2 meeting.
At that meeting, the cartel’s leaders announced they may consider rolling back some of the production cuts they agreed upon last year, possibly later in 2024, if market conditions are favorable. What traders heard, however, was that they would for sure roll back those cuts. Prices slumped. OPEC had to say what it had said again, more emphatically.
“Those funds who thought we were heading into a production battle, had their concerns quickly assuaged when OPEC+ members went on a PR campaign to assure the world their changes to production would be market dependent,” StoneX oil analyst Alex Hodes told Reuters on Monday.
The emerging sentiment also got a boost from expectations for strong fuel demand this driving season in the United States. The reversal in prices, as they snapped a three-week losing streak, comes despite sub-expectation industrial activity data from China. The country reported factory output growth of 5.6% which would normally be a solid enough figure. However, analysts had expected growth of 6%, so the actual reading was dubbed disappointing by Reuters.
Yet even this could not dampen oil trader optimism once it sank in that OPEC was not going to return any supply to market unless the price was right. Reuters’ John Kemp reported in his latest column that speculators had bought back some of the oil futures they’d sold immediately after the last OPEC+ meeting, with the total purchases at the equivalent of 80 million barrels over the week to June 11.
Still, Kemp wrote that overall bearishness remained the dominant sentiment among oil speculators because of the spare capacity that OPEC+ has and because of rising production from places like the United States, Guyana, and Brazil. Interestingly, energy consultancy Rystad Energy recently predicted that global oil supply growth will be virtually non-existent this year because of the OPEC+ cuts without mentioning spare capacity.
The firm pointed to the OPEC+ cuts and their recent extension into next year and noted that “US shale remains a trustworthy source of growth, though less elastic to price changes and more consolidated after continued rounds of mergers and acquisitions. This reduces the short-term upside potential for a surprise in US growth.”
Indeed, the Energy Information Administration recently forecast this year’s average oil production rate in the U.S. at 13.2 million barrels daily, which would be a modest 2% increase on the year. Next year, the EIA sees output rising by another half a million barrels daily to 13.7 million barrels daily.
With the consolidation underway in U.S. shale and with the uncertainty around what direction oil prices will go into on any day, let alone over a longer horizon, drillers are not exactly eager to drill. The claim that whatever happens anywhere else U.S. shale will step in to ensure sufficient supply no longer holds true in the age of capital discipline and investor returns above all else.
Meanwhile, volatility remains heightened. One weekly EIA report is all it would take to reverse the course of prices in case it suggests fuel demand is falling short of expectations. Some believe it would take even less because a lot of the recent buying that saw prices inch higher was in fact covering of short positions, according to Mizuho Securities’ Bob Yawger.
On the other hand, a bullish EIA report on inventories would push prices further up—and create a problem for the Biden administration, which is already considering more emergency releases from the SPR to keep gas prices lower in the months ahead of the November elections.
By Irina Slav for Oilprice.com
