Oil prices trade near 2-year high, but ‘jury is still out’ on demand recovery

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Oil prices have climbed to their highest levels in more than two years, set to end the week with a gain of over 4%, as traders bet that recovery in demand this summer will lead to tighter crude supplies. Demand recovery, however, isn’t a sure thing.

“There are a lot of moving parts in oil markets at the moment, but…the key upside support right now is the growing realization that demand is recovering” from the pandemic, said Matthew Parry, head of long-term analysis at Energy Aspects.

In its Short-term Energy Outlook report released in May, the Energy Information Administration said it expects global oil consumption to average nearly 97 million barrels per day in the second quarter of this year, up 2.2 million barrels a day from the first quarter, and climb further — to 98.9 million barrels per day in the third quarter, and to 100 million barrel a day in the fourth quarter. The EIA’s next monthly report will be released on Tuesday.

“Market expectations for this summer’s demand recovery are lofty, though the jury is still out for whether these will be fully realized,” Parry told MarketWatch.

Bets on that recovery have led U.S. benchmark crude prices to their highest since October 2018 and global benchmark prices to the highest since May 2019.

On Friday, July West Texas Intermediate crude futures contract
CLN21,
+1.00%

CL.1,
+1.00%
was up 45 cents, or nearly 0.7%, at $69.26 a barrel on the New York Mercantile Exchange, with the front-month looking at a weekly rise of around 4.4%. Global benchmark August Brent crude
BRNQ21,
-0.18%

BRN00,
-0.18%
tacked on 26 cents, or 0.4%, to $71.57 on ICE Futures Europe, trading roughly 4.2% higher for the week.

Also see: Why summer cooling demand and Atlantic hurricanes don’t guarantee further gains for natural-gas prices

“Optimism for a normalization of summer demand amid both a reopened European and U.S. economy has helped push crude prices higher in recent weeks,” said Troy Vincent, market analyst at commodity market analysis provider DTN. Production and drilling restraint from U.S. crude producers and a weakening U.S. dollar has also contributed to oil’s rise, he said.

Efforts to get supply chains “operating smoothly once again, and to restock goods inventories” on a national and global level has driven diesel demand “well higher and is a major supportive factor for refined fuel demand that is often overlooked,” said Vincent. He pointed out that diesel demand is 2% above the level seen in 2019, before the COVID-19 pandemic.

Based on data from DTN, however, gasoline demand is 2% below 2019 levels, said Vincent.


“…a combination of the lingering high unemployment rate, already high gas prices, and the ability of a large number of those that are employed to continue to work from home is preventing the realization of the pent-up demand surge in gasoline demand many had hoped for.”


— Troy Vincent, DTN

While “it’s clear that individuals are excited to socialize and travel after a year of COVID-19 quarantines and restrictions, a combination of the lingering high unemployment rate, already high gas prices, and the ability of a large number of those that are employed to continue to work from home is preventing the realization of the pent-up demand surge in gasoline demand many had hoped for,” he said.

The steep demand growth trend the market witnessed in the January to April period in nearly every region in the U.S. has “stalled out” over the four to six weeks, Vincent said. “Demand growth is following a much more normal seasonal strengthening trend rather than a pent-up demand surge.”

Even so, he believes the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, made the right choice by keeping with their plan to gradually raise oil production.

“Global refinery runs and U.S. net imports of crude are set to move higher through the summer,” Vincent said. “Hope of European social and economic activity experiencing a recovery similar to what we saw in the [January to April] period in the U.S. is reason to be optimistic for refined product demand.”

Read U.S. gasoline demand may hit a record this summer: GasBuddy



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