Price Movements in Crude Oil
Oil prices Brent & WTI (CMP: $73.07 & 71.08/bbl) as on 14th June 2021 have been trading higher in the recent week with gains of double digit ( 9.7% for Brent and 11.5 percent for WTI) in the time period 21st May 2021 to 14th June 2021 as shown in the graph alongside. On the MCX futures, oil prices rose by 11.5 percent in the same time frame.
International Energy Agency estimates of global demand to return to the pre-pandemic levels, increase in demand for oil due to ease of lockdowns in US leading to more vehicular traffic and air traffic, maintenance season in North Canada and North Sea, OPEC’s compliance to balance the oil markets, prospect of extra supply coming to the market soon from Iran fading with talks dragging on over the United States re-joining a nuclear agreement with Tehran have raised the optimism in oil prices.
Oil demand to increase
In comparison to March 2020, the global economy is stabilised and the recovery in oil prices from the lower levels when compared to the past year is a testament of the fact. Motor vehicle traffic is returning to pre-pandemic levels in North America and much of Europe, and more planes are in the air as anti-coronavirus lockdowns and other restrictions are being eased.
Moreover, the International Energy Agency (IEA) said in its monthly report that the Organization of the Petroleum Exporting Countries and allies, known as OPEC+, would need to boost output to meet demand set to recover to pre-pandemic levels by the end of 2022.
The Organization of the Petroleum Exporting Countries (OPEC) has also reinforced the view of healthy demand, sticking to its forecast that demand in 2021 would rise by 5.95 million barrels per day, up 6.6% from a year earlier.
The Energy Information Administration has also forecast U.S. fuel consumption would grow by 1.48 million bpd in 2021, up from a previous forecast of 1.39 million bpd has also boosted the rally in oil prices in the recent weeks
Inflationary concerns heating up
Oil prices have been on the rise which has in turn lead to inflationary concerns in the US.
Central Bankers have come to the fore to balance the growth in global markets by infusing enormous amount of liquidity and the impact can clearly be seen in rising inflation in the US.
Although inflation is a good sign of growth in the economy, it comes at a time when the global growth is still hindered by the pandemic induced uncertainty.
U.S. consumer prices rose solidly in May at 5% (YOY), leading to the biggest annual increase in nearly 13 years as a reopening economy boosted demand for travel-related services.
What next for Oil?
Rising inflation in the US has already led the Fed to starting debating how and when to start tapering a massive asset-purchase program that helped support the U.S. economy during the pandemic.
Inflation could get a boost from the labor market, where layoffs are subsiding. Employers are raising wages as they compete for scarce workers, with millions of unemployed Americans remaining at home because of trouble securing child care, generous unemployment benefits and lingering fears of the virus even though vaccines are now widely accessible.
The Labor Department said initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 376,000 for the week ended June 5. That was the lowest since mid-March 2020 when the first wave of COVID-19 infections barreled through the country, leading to closures of nonessential businesses. Claims have decreased for six straight weeks.
With at least half of the adult U.S. population fully vaccinated against COVID-19, Americans are traveling. Increasing vaccination drives in US and Europe and China is a dominant factor in ramping oil demand and oil demand is expected to grow by 5.5 million barrels per day to 6.5 mbpd in 2021 according to Reuter’s recent survey. This was in line with a cautiously optimistic picture drawn by the International Energy Agency earlier in April that producers may then need to pump 2 million bpd more to meet the expected demand.
Hedge funds increase their bets on oil
Money managers are increasing their bets on oil for most of the first quarter as can be seen in the graph alongside. The net longs as on 8th June stood at 4,24,476 contracts when compared to 3,81,947 contracts as on 11th May 2021. This clearly reflects the optimism of global fund managers in a commodity which is regarded as a benchmark of global economy.
The optimism in global markets can make further grounds for oil prices to move higher. We expect WTI oil prices (CMP: $71/bbl) in the international markets to head higher towards $77/bbl from a month perspective while MCX oil futures (CMP: Rs.5214/bbl might move higher towards Rs.5600/bbl mark in the same time frame.