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Oil Market Analysis: can oil prices continue to rise on positive demand outlook?
Lucia Han
2021-06-10 856

Abstract: Optimism about strong oil demand was reinforced by the reopening of businesses and strong economic recovery in major oil consuming countries. WTI crude briefly settled above $70 / BBL, its highest level since 2018, on a fueling bullish sentiment in the oil market. Many market participants expected U.S. crude prices to hit $80 / BBL this summer as personal and business activity were picking up and seasonal demand were rising. Will the future trend of crude oil in line with the expectations? What potential risks of oil market should investors pay attention to?

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WTI crude and Brent crude prices climbed to their highest levels in more than two years, helped by wider vaccination coverage and the lifting of business restrictions around the world. The prices rose on a weaker dollar after U.S. non-farm payrolls data for May came in at 559,000, below market expectations. The weaker-than-expected jobs data eased fears that stronger inflation would force the Federal Reserve (Fed) to rein in its quantitative easing (QE), helping fuel a strong rally in oil and other commodities. Separately, OPEC and its Allies remained optimistic about a recovery in global oil consumption, sending a positive signal about the rebalance between supply and demand in the oil market. Still, as talks between the U.S. and Iran resumed, investors expected Iran's crude exports to increase following a nuclear deal, disrupting the demand recovery and weighing on crude prices. So why are U.S. - Iran talks affecting oil prices? Can crude oil prices continue to rise in the future?

Impact of the U.S. -Iran talks on oil markets

The U.S. -Iran nuclear talks may add to oil market volatility. The talks grew out of the 2015 Joint Comprehensive Plan of Action (JCPOA) signed between Iran and six world powers, including the United States. Under JCPOA, significant limits were placed on Iran's nuclear program, and in exchange, the world powers lifted sanctions on Iran. In 2018, former U.S. President Donald Trump pulled out of the deal, saying it failed to curb Iran's missile program and regional influence. With worsened relations with Iran, the United States ended exemptions under JCPOA to Iran and completely halted Iranian crude oil exports. 

However, since taking office, U.S. President Joe Biden has stressed that diplomacy is the best way to prevent Iran from acquiring nuclear weapons. As a result, the two countries returned to the negotiating table, and investors are likely to see a surge in Iranian oil supplies as the United States eased sanctions on Iranian oil exports. In addition, sources have indicated that Iran could increase its crude oil production to between 4 million and 6.2 million barrels per day if the two countries reach a deal. However, many believe that the talks will not produce a deal anytime soon, and that even if a deal is reached, the flow of Iranian crude oil to the market is likely to be gradual. And the increase in Iranian crude output could be absorbed by rising demand, when pent-up tourism demand may drive consumption growth in the second half of the year. Then what does the demand and supply look like in the oil market?

Oil demand soared, while crude inventories plummeted

The surge in consumer demand in the United States, as a result of widespread vaccination and strong economic recovery, led to a sharp decline in U.S. crude inventories. EIA's latest crude oil inventory data showed U.S. commercial crude oil stocks fell by 5.08 million barrels to 479.27 million barrels, the lowest level since February 19 and nearly 3% below the five-year average. Moreover, roughly 2 million people flew through U.S. airports on June 6, according to the Transportation Security Administration (TSA), the largest number of passengers the agency has taken in a single day since the outbreak wreak havoc on global travel. Meanwhile, demand for crude oil would continue to surge during the summer months as diesel and gasoline consumption picks up ahead of the peak consumer season. In addition, the rapid return of mobility in Europe due to the easing of restrictions on business activity and the prospect of a seasonal uptick in industrial activity in the U.S. and Europe are also important reasons for the growing bullish sentiment in the oil market. But the COVID-19 crisis in India, the third-largest oil consumer, and other parts of Asia adds a bit of uncertainty to the oil recovery. Although the number of new infections in India has dropped below 100,000 a day, this is not enough to reverse its severe pandemic situation. That has posed a threat on the oil market, alongside with long-term concerns -- climate change, which has forced governments to advocate a global energy transition, and the unpredictability of Iran's nuclear issue.


Technical analysis of WTI crude

Crude oil prices have been on a bumpy upward path since early April, despite increasing uncertainty in commodity markets due to growing fears of higher inflation. Crude oil sold off in late May as investors worried that high commodity prices would lead to an early Fed rate hike after the Fed released its minutes that said Fed officials were cautiously considering an earlier exit from its stimulus program. But WTI price had risen for more than a week on fundamental factors such as plummeting crude oil inventories and strong demand expectations, and settled above $70 / BBL, the highest level since October 2018, as shown below:


Source from: Mitrade

By technical analysis, crude oil prices have been flirting with the upper Bollinger Band for several consecutive days, with the RSI near 68, approaching what is considered as the overbought territory. It may cause short-term market panic, although investors changed their wait-and-see attitude. Oil prices are still likely to be supported by the fundamentals, but now seem to be pricing in good news for the market, and once that is digested, high crude prices could take a hit.

To sum up, oil prices may still have room to rise in the medium to long term as vaccination coverage increases and the economies of major oil-consuming countries recover strongly on an increasingly positive outlook for oil demand. But in the short term, while crude oil prices have climbed to a nearly two-year high, the Fed's plan to tighten its QE in advance has undoubtedly dampened the bullish sentiment, and uncertainty over the nuclear talks could add to volatility in the oil market. Therefore, short-term investors should be alert to the high oil price correction, while paying attention to short-term oil price fluctuations brought by investment opportunities.


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