Oil futures experienced a significant climb on Friday, leading U.S. prices to rise for the month. According to Edward Moya, a senior market analyst at OANDA, “the oil market selloff got out of control.” Moya believes that if the U.S. economy manages to grow at 1.7% in the second quarter of this year, oil prices could be much higher. On Friday, June West Texas Intermediate (WTI) crude rose $2.02, or 2.7%, to settle at $76.78 a barrel on the New York Mercantile Exchange. Prices based on the front-month contract dropped 1.4% for the week, but gained 1.5% for the month.
The sharp climb in oil futures followed weeks of plummeting prices due to concerns about demand versus supply. Inflation, supply chain problems, and Iran’s potential return to the market had also played a role in exerting downward pressure on oil prices. However, the demand outlook has improved significantly in recent months, particularly in the United States and Europe, as vaccination rollouts have picked up pace and lockdown measures have eased.
Supporting oil prices are major oil producers, such as the Organization of the Petroleum Exporting Countries (OPEC) and its allies, referred to as OPEC+, actively conforming to their production cut agreements. The group has been cautious with increasing output too quickly, fearing a relapse of the collapse in demand that occurred in 2020 amid the global Covid-19 pandemic. In its latest meeting, OPEC+ acknowledged the improved demand outlook and agreed to a gradual easing of production restrictions.
Furthermore, oil prices have been bolstered by the fall in the U.S. dollar. A weaker dollar typically supports commodities priced in the currency by making them more attractive to buyers using other currencies. The U.S. Dollar Index, which measures the greenback’s value against a basket of six major currencies, declined to its lowest level since the beginning of the year.
On the supply side, the market has been closely watching the status of the Iran nuclear deal and its potential impact on global oil supplies. An agreement would likely lead to a lift of sanctions against Tehran and, subsequently, an increase in Iranian oil exports. However, negotiations have been difficult and a deal remains elusive. Yet, the prospect of additional Iranian supply has weighed on prices and will continue to do so unless a deal is reached.
Rising geopolitical tensions have also played a role in pushing oil prices higher, with recent escalations in the Israeli-Palestinian conflict causing particular concern. While these conflicts do not directly impact oil production, they can lead to regional instability and cause disruptions in oil supply lines.
As we move further into 2021, oil demand growth is expected to accelerate due to the ongoing vaccinations and easing lockdown restrictions. The International Energy Agency (IEA) recently raised its 2021 global oil demand growth forecast to 5.7 million barrels per day (bpd), up 230,000 bpd from its previous prediction. The agency explained that the growth would be driven by the second half of the year, as vaccinations continue and economies worldwide recover.
However, numerous uncertainties surrounding the trajectory of the pandemic and the pace of economic recovery continue to cloud the outlook for oil demand. The efficacy of vaccines against new virus strains and the potential for new lockdown measures is yet to be seen. Additionally, the US Federal Reserve’s stance on interest rates and monetary policy could influence the value of the dollar and, subsequently, oil prices.
In conclusion, the demand outlook for oil has improved significantly in recent months, particularly in the US and Europe, as vaccination campaigns and easing lockdown measures have fostered economic recovery. OPEC+ conforming to its production cut agreements and geopolitical tensions have also pushed oil prices higher. However, uncertainties surrounding the pandemic’s trajectory, vaccine efficacy against new strains, and potential lockdown measures continue to leave the oil market’s future uncertain.
