Crude oil futures rallied on Tuesday, with U.S. and global benchmark prices on track to mark their highest settlements in more than two years, after the Organization of the Petroleum Exporting Countries and their allies kept their current plan to gradually increase oil production through July in place.
“Sticking to increases planned at the April meeting is what the market needs,” said Ann-Louise Hittle, vice president Macro Oils, at Wood Mackenzie, in emailed commentary. “Demand growth is outpacing supply gains even with the agreed month-by-month OPEC+ production increases taken into account.”
The oil-producer group known as OPEC+ “reaffirmed the existing commitment” to “gradually return 2 million barrels a day…of the adjustments to the market.”
The pace of that return of production will be “determined according to market conditions,” OPEC+ said in a press release issued just after the meeting concluded.
At a meeting on April 1, the group of producers said it would raise daily oil production by 350,000 barrels in May, 350,000 barrels in June and by 441,000 barrels in July. At the time, Saudi Arabia also said it would roll back its voluntary output cut by 250,000 barrels a day in May, 350,000 barrels a day in June and by 400,000 barrels a day in July.
On Tuesday, OPEC+ “emphasized the need to continue to consult and closely monitor market fundamentals” and maintain the monthly OPEC+ meetings until the end of the original April 2020 agreement, which is valid until April 30, 2022.
West Texas Intermediate crude for July delivery
climbed $2.29, or 3.5%, to $68.61 a barrel on the New York Mercantile Exchange. Based on the front-month contracts, prices are poised for their highest settlement since October 2018, according to FactSet.
The August Brent contract
rose $1.72, or 2.5%, to $71.04 a barrel on ICE Futures Europe, on track for the highest front-month finish since a level not seen since May 2019.
Prices were trading sharply higher even before Tuesday’s OPEC+ decision. OPEC’s technical committee on Monday confirmed forecasts for a rebound of six million barrels a day in world oil demand this year.
Oil investors are optimistic that demand is improving as economies recover from the coronavirus pandemic and a dwindling supply glut may mean the market can absorb additional supply.
The “oil accumulated during the pandemic months is almost gone, and the second half of the year could see a sharp decline in oil reserves according to OPEC’s latest forecast, a decline that would comfortably surpass the 2021 average and create the need for extra oil pumping,” noted Ipek Ozkardeskaya, senior analyst at Swissquote.
The analyst said the end of COVID-19 lockdown measures and increased economic activity, plus improved prospects for global travel, should boost global oil demand.
Still, “there remains concern about the impact of the return of Iran to the market,” said James Williams, energy economist at WTRG Economics, as negotiations between world powers over a nuclear deal with Iran continue.
A deal would likely lead to the U.S. to lift sanctions on Tehran. That would add about 700,000 barrels per day of oil within three months after sanctions are lifted, Williams told marketWatch.
“The longer it takes for an agreement to be reached, the lower the risk as demand continues to rise in what will soon be a post COVID market,” he said. “In the short-term the lockdowns in India are the greatest uncertainty in the forecasts.”
July natural gas
rose 4% to nearly $3.11 per million British thermal units. A settlement above $3.109 would be the highest since February.
“Strong power burn expectations and relatively weak production levels continue to keep the market supported,” said Christin Redmond, commodity analyst at Schneider Electric, in a daily note.
The National Oceanic and Atmospheric Administration’s short-term forecasts predict above-normal temperatures for the Northeast and Midwest through mid-June, “which is expected to boost air conditioning use, which in turn could increase power generation demand for gas,” she said.