Business

It's net positives for oil as demand signs light up

It's net positives for oil as demand signs light up

Over the past two weeks, oil prices have shot up, with a barrel of Brent reaching $65 - and surpassing the most optimistic expectations, including that by Goldman Sachs. The premier US investment bank had said early this month that prices could reach $65 in July.

However, Goldman Sachs changed its forecast two days ago, and now expects $75 this year.

Such an unexpected improvement can be attributed to many a reason, especially on the economic side. This should help maintain ongoing gains, although there are still factors that could yet undermine the growth story.

Sticking to deal

Factors that have largely contributed to price recovery include the commitment by OPEC+ to reducing production, which amounted to 100 per cent, as well as the additional Saudi cuts of about one million barrels per day. Climate also had a hand with the frost wave that struck Texas, which led to the closure of oil wells and refineries.

Another dominant factor in the price upturn lies in the distribution of COVID-19 vaccines, which led to a decline in the number of infections in many parts of the world, including China, India, Britain, South Korea.

The vaccine has also contributed to reducing economic closures and reviving sectors, something which led to pushing demand for oil and its products. India’s crude oil imports, for example, will rise this year by 15 per cent, according to Bloomberg, and imports from China and South Korea have already increased 6 per cent.

Re-balancing is on

These combined have created some balance in the market, despite some limited disparity between supply and demand. The sudden increase in oil prices also highlights an aspect that may not be truly visible yet.

It has to do with the expectations of economies and institutions, including oil companies, that solutions to the COVID-19 crisis will accelerate by the third quarter, which will lead to further economic recovery.

Consequently, demand will increase, reflecting positively on prices, especially as main consuming countries are planning to fill up their oil tanks in the third quarter in preparation for the winter period to avoid any shortages.

This is indeed a net positive for oil markets and a good sign that social and economic activity will return to normal. The wolf does not run in vain…

On solid reasons

The growing demand to buy and store oil at current prices by companies and countries is not a matter of chance. These are based on expectations tied to the decline in the pandemic and resumption of activity, albeit gradually.

Certainly, oil prices will fluctuate due to geopolitical developments, speculation, or natural disasters. As for the geopolitical factor, it is noticeable that the US administration under President Joe Biden wants to reinstate the nuclear agreement with Iran, and seeking to cancel the sanctions imposed on Tehran, including those on oil exports.

Loosening of sanctions

There are strong indications that Washington will push in this direction. Within one month, for example, the previous resolution imposing sanctions on Iran by the United Nations was cancelled. Iranian diplomats working at the UN have been allowed to move freely and the US is ignoring Iran's actions regarding increasing uranium enrichment and developing ballistic missiles and interfering in the internal affairs of other countries.

This means Iranian oil exports will return to markets within the coming weeks, which also means pumping additional supplies estimated at between 1.5 mbd to 2 mbd, given that Iranian oil exports had not completely stopped, as large-scale under-the-radar operations took place amounting to about one million barrels a day.

This will constitute a new factor that will add pressure on oil prices, but that will take time. The rehabilitation of the Iranian oil fields will not be immediate. There will be a gradual return commensurate with the increase in demand resulting from the global economic recovery. All of which points to stability for oil…

- Mohammed Al Asoomi is a specialist in energy and Gulf economic affairs.