Price. That's the major news in the oil market these days.
Both main benchmarks—WTI and Brent—seem to have grown comfortable in the $70s range lately; neither has visited that area since 2018.
What's behind this rally? Two primary catalysts: demand and inflation.
1. Demand
Oil demand, especially in the U.S., has skyrocketed. In May, total domestic U.S. petroleum deliveries were 19.8 million bpd, according to the API’s Monthly Statistical Report. This is only 2.8% less than petroleum demand in May 2019.
Jet fuel deliveries in May increased by 8% compared to April, but were still 26.4% below May 2019 levels. Recently, both OPEC and the IEA raised their demand forecasts for the rest of 2021.
The IEA’s forecast reflected an increase in oil demand in India and China, which the organization had not previously anticipated. With these adjusted figures, global oil demand is expected to hit 96.7 million bpd in 2021.
Moreover, several major banks have added to the positive outlook by predicting that the price of oil will hit the triple digits in 2022.
That said, it's important to maintain a healthy skepticism where price forecasts are concerned, because they rarely ever come to fruition. However, these forecasts—regardless of their accuracy—are adding to the bullish sentiment we are currently seeing in the market.
2. Inflation
Inflation has been a topic of conversation in U.S. finance for a few months now, but, as we said here in March, what matters most for the oil market is actually the value of the U.S. dollar against other currencies.
As oil prices have escalated, the U.S. dollar’s value has generally dropped a little. Since Jan. 4 of this year, the dollar’s value has slumped 1.7% compared to the British pound, 1.2% compared to the Russian ruble and 2.5% compared to the Canadian dollar.
More importantly, the sentiment and expectation of inflation is strong. In fact, on Wednesday, two officials from the U.S. Federal Reserve said even though they expect the current inflationary trends to be temporary, they now believe this period of inflation will last longer than expected.
How much longer? “Rather than it being two to three months, it may be six to nine months.” The officials say they are not trying to instill fear or signal a change in policy, but rather, trying to “reset public expectations.” The expectation that inflation will last longer than previously thought could keep oil prices elevated.
OPEC+ is supposed to video conference on July 1 for its now monthly meeting. The higher oil prices are welcome news for oil producers, and there will surely be pressure to increase production to meet higher demand. Russia is one country that always wants to increase production numbers.
However, OPEC+ will likely also look at inflation figures. With few exceptions, most producers sell their oil in dollars. As the value of the dollar drops (and is expected to drop), OPEC+ members want correlating high prices to offset the loss of value of their revenue currency.
According to the Wall Street Journal, OPEC+ is considering raising production by 500,000 bpd in August with additional monthly increases, however this proposal has not been formally discussed. Russia may be interested in increasing production, but Saudi Arabia has yet to express a position.