Crude oil futures rallied on Tuesday, with U.S. and global benchmark prices marking 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 short meeting concluded. The next OPEC+ will be held on July 1.
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 $1.40, or 2.1%, to settle at $67.72 a barrel on the New York Mercantile Exchange. Based on the front-month contracts, prices saw their highest settlement since Oct. 22, 2018, according to Dow Jones Market Data.
The August Brent contract
rose 93 cents, or 1.3%, to $70.25 a barrel on ICE Futures Europe, paring some the earlier gains that lifted prices to as high as $71.34. Prices logged the highest front-month finish 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 to revive the 2015 Iran nuclear agreement 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.”
Rounding out action in the energy markets Tuesday, July gasoline
tacked on 1.6% to $2.17 a gallon, the highest settlement since June 2018, while July heating oil
added 1.6% to $2.07 a gallon, the highest since September 2019.
Weekly data on U.S. petroleum supplies from the Energy Information Administration will be released on Thursday, a day later than usual because of Monday’s Memorial Day holiday.
IHS Markit analysts expect the report to show that U.S. crude supplies fell 1.7 million barrels for the week ended May 28. They also forecast inventory declines of 1.2 million barrels for gasoline and 1.6 million barrels for distillates.
Also on Tuesday, July natural gas
rose nearly 4% to settle at $3.10 per million British thermal units. That was the highest since May 17, when prices finished at nearly $3.11 — 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.