Demand pessimism about the oil market has dissipated

The pessimism that has dominated the global oil market for weeks, with traders suspecting weak demand growth this week, has begun to fade, replaced by emerging signs of optimism. All because OPEC repeated what it said at its meeting on June 2.

At that meeting, cartel leaders announced they might consider rolling back some of the production cuts they agreed to last year, perhaps later in 2024, if market conditions are favourable. But what traders have heard is that they will definitely roll back those cuts. Prices fell. OPEC had to say what it said again, and more emphatically.

“Those funds that thought we were heading into a production battle had their fears quickly dispelled when OPEC+ members embarked on a PR campaign to reassure the world that their production changes would be market-driven,” StoneX oil analyst Alex Hodes said. Tell Reuters on Monday.

Emerging sentiment was also supported by expectations of strong fuel demand this driving season in the US. The price reversal comes as it ended a three-week losing streak, despite Chinese industrial activity data that came in below expectations. The country reported factory production growth of 5.6% which is a strong enough figure. However, analysts were expecting growth of 6%, so the actual reading was just as well Dubbed Disappointing by Reuters. RELATED: Brazil looks to challenge China's dominance in rare earth metals

However, even this could not dampen the optimism of oil traders once it sunk in that OPEC would not return any supplies to the market unless the price was right. Reuters John Kemp mentioned In his latest column, speculators bought back some of the oil futures contracts they sold immediately after the last OPEC+ meeting, with purchases totaling the equivalent of 80 million barrels during the week ending June 11.

However, Kemp wrote, the overall bearish trend remained the prevailing sentiment among oil speculators due to excess capacity held by OPEC+ and due to rising production from places like the United States, Guyana and Brazil. Interestingly, recently energy consulting firm Rystad Energy And he expected That global oil supply growth will be almost non-existent this year due to OPEC+ cuts, not to mention spare capacity.

Pointing to the OPEC+ cuts and their recent extension into next year, the company noted that “US shale remains a reliable source of growth, although it is less resilient to price changes and more consolidated after sustained rounds of mergers and acquisitions. This reduces the short-term Upside potential for a U.S. growth surprise.”

In fact, the Energy Information Administration recently projected that the average rate of oil production in the United States this year will reach 13.2 million barrels per day, which represents a modest increase of 2% over the year. Next year, the EIA expects production to rise another half a million barrels per day to 13.7 million barrels per day.

With consolidation underway in US shale and uncertainty about which direction oil prices will go on any given day, let alone the longer term, drilling companies aren't exactly keen on drilling. The claim that no matter what happens elsewhere, US shale will step in to ensure adequate supply no longer holds true in an era of capital discipline and investor returns above all else.

Meanwhile, volatility remains high. A weekly EIA report is all it takes to reverse the price trend if it indicates that fuel demand is not living up to expectations. Some believe it will take less than that because much of the recent buying that drove prices higher was actually short covering, according to Mizuho Securities. Bob Yugger.

On the other hand, a bullish EIA report on inventories would push prices higher and create a problem for the Biden administration, which is already considering more emergency releases from the Strategic Petroleum Reserve to keep gas prices low in the months before the November election.

Written by Irina Slav for Oilprice.com

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