You wouldn’t believe the oil price had been quietly falling since early July when you went to fill up your tank this summer. Gasoline demand is nearly back to pre-pandemic levels from 2019. As a result, pressure on refiners has been so marked that prices have risen sharply enough to make the Biden administration urge Russia and Saudi Arabia to pump more oil to ease a perceived tightness.
But the reality is the tightness is in refined products — not crude oil. OPEC+ is unlikely to ramp up output to appease the U.S. — or anyone else, for that matter.
Mixed output story
Last month, after intense negotiations with the UAE, OPEC+ agreed to boost output by 400,000 barrels per day each month from August. The move was intended to bring the group’s output back to its pre-pandemic level by the end of 2022.
Even so, oil prices have dipped this month, in large part over fears regarding the spread of the more contagious Delta variant of the coronavirus and resulting slow growth around the world, particularly in Asia where vaccination rates are generally low.
The story is mixed, though, by region.
Brent crude prices dropped 6% last week, its largest week of losses in four months, while WTI slumped nearly 7% in its biggest weekly decline in nine months, according to Reuters. Support was further weakened when the IEA said demand for crude oil ground to a halt in July and was set to rise at a slower pace over the rest of the year because of surging infections from the Delta variant.
But a weaker outlook hasn’t stopped the Biden administration from calling for an investigation into profiteering. Although Brent crude prices are up a third from the start of the year in July, retail gasoline prices in the U.S. were up some 41.8% compared with July 2020, according to the Labor Department quoted in a BBC post. The government fears rising gas prices could hamper the recovery.
Oil rig count increases
Following some consolidation in the industry, U.S. energy firms added the most oil rigs in a week since April 2020 last week at 397, up from 172 a year ago. The combined oil and gas rig count reached 500, more than double its level a year ago. That increased supply may help ease gasoline prices once output reaches refineries and the summer driving season ends.
Wider confidence in stronger oil prices seems to be fading among investment banks.
Goldman Sachs cut its estimate for the global oil deficit to 1 million barrels per day from 2.3 million bpd in the short term, citing an expected decline in demand in August and September. However, it suggested demand should hold up later in the year due to ongoing vaccination rates keeping the US economy on track. Meanwhile, confidence in Asian growth is not so strong.
The sense is global crude oil prices are going through a short-term down cycle which may last only one quarter before confidence recovers and, with it, prices.
With OPEC managing to retain fairly tight control on output and demand recovering close to pre-pandemic levels, it would take a significant escalation of global infection rates and widespread application of lockdowns to precede a prolonged fall in oil prices.
The market remains in deficit. OPEC will be keen to keep it there.
A rising U.S. rig count is unlikely to turn that around anytime soon. So, today’s oil price softening may last no more than a few months before we see prices back about $70 again.