Oil Prices Reach Two Year Highs As Demand Rebound Exceeds Expectations

Increasingly, analysts believe production upswings can be easily absorbed: File Image/Pixabay

Confidence in demand recovery was firmly expressed on Tuesday as global benchmark Brent settled above $70 per barrel for the first time since 2019, buoyed by the contention that the market is now strong enough to absorb production increases that were previously regarded as a threat.

The optimistic view was provided by the Organization of Petroleum Exporting Countries (OPEC) and its allies who agreed on Tuesday to an output increase of 841,000 barrels per day (bpd) in July, following hikes in May and June; also, the International Energy Agency recanted previous estimates and suggested that global oil demand could rebound to pre-pandemic levels in as little as one year.

Also, Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie, said in a note, "Demand growth is outpacing supply gains, even with the agreed month-by-month OPEC+ production increases taken into account."

As a result, West Texas Intermediate for July delivery climbed $1.40 to settle at $67.72 per barrel, while Brent for August settlement rose 93 cents to $70.25 per barrel, the highest since May 2019.

Concern over Iran was also assuaged on Tuesday with the news that talks to revive the 2015 nuclear deal with the U.S. have been delayed, and analysts doubt the current round of talks will lead to an agreement.

Michael Lynch, president of Strategic Energy & Economic Research, said, "The demand side looks good....people are looking more and more at a big travel season in the Northern Hemisphere, at least in Europe and the U.S."

More good news - indications of tight supply - were evident on Tuesday with news that the spread between WTI's nearest two December contracts rallied to its widest backwardation since the two contracts began trading.

As for rising Covid rates and corresponding lockdowns in several Asian countries, observers pointed out that this was partly due to abysmal vaccination rollouts (Malaysia has administered one dose to only 6 percent of its residents, for example).

Amrita Sen, chief oil analyst at Energy Aspects, added that "Asia is also quite obsessed with zero case count, rather than learning how to live with Covid, which the West is doing, like another flu effectively."

She concluded that "We need Asia to get vaccinated: that's when globally demand can get back to 2019 levels."