Weekly Energy Recap: If oil prices were below $70, would IEA still tell OPEC to open taps?

Oil prices continued their rally for the third week in a row, amid confidence in the strong oil demand outlook and accelerating vaccinations allowing people to travel more.

On the week closing, Brent crude rose to $72.69 per barrel. West Texas Intermediate (WTI) rose to $70.91 per barrel.

International benchmarks’ futures forward curves are further tightening, and the Arabian Gulf Dubai benchmark is trading at its steepest backwardation market structure for almost a year, which indicates supply tightness.

Brent crude seems to have settled above the $70 mark since the beginning of June. WTI closed the week above $70 for the first since October 2018, but back then it had moved steeply downward and ended that year at $45 per barrel even though oil inventories from the Organization for Economic Co-operation and Development (OECD) were at 19 million barrels above their five-year average.

The June monthly oil market report of the Organization for the Petroleum Exporting Countries (OPEC) kept the second half of 2021 oil demand growth unchanged at 96.58 million barrels per day (bpd), up 5.95 million from 2020 when demand was at 90.63 million bpd.

OPEC reported that OECD April commercial oil inventories fell to 25 million barrels below the latest five-year average, around 34 million barrels higher than the pre-pandemic 2015–2019 average, and 160 million barrels lower than the same month a year ago. This means that OPEC+ has done a tremendous job just one year on from the largest oil output cuts in history, and has successfully managed to contain the largest oil demand shock in history.

The US Energy Information Administration (EIA) June Short-Term Energy Outlook came with bearish notes that the market remains subject to heightened levels of uncertainty related to the ongoing economic recovery from COVID-19.

However, the EIA sees the global crude oil market balancing in the third quarter of this year. It predicts a decline in oil prices, and expects Brent crude to average $68 per barrel this year and $60 in 2022 as global oil production increases.

The EIA expects US oil output to rise to 11.8 million bpd in 2022. Though WTI has breached the $70 mark for the first time since October 2018, the US still produces 10.8 million bpd through the Permian Basin, where the rig count rose to its highest level since April 2020.

The International Energy Agency (IEA) June report came with huge contrasts as it forecast that global oil demand is set to return to pre-pandemic levels by the end of 2022, but reported that OECD oil inventories fell 1.6 million barrels below the pre-pandemic 2015-2019 average for the first time in more than a year.

How can the IEA suggest to OPEC to open the taps while it forecasts oil demand to surpass pre-pandemic levels by the end of 2022? If prices were below the $70-per-barrel mark, would the IEA still suggest to OPEC to loosen oil output cuts?

The latest figures from the Commodity Futures Trading Commission on June 8 showed that long positions on crude oil futures on the New York Mercantile Exchange numbered 661,994 contracts, up 15,477 from the previous week (1,000 barrels for each contract).

• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter: @faisalfaeq