Gasoline demand in the United States hit a record high in the week ending July 2, a clear indication the country is quickly recovering from the economic malaise caused by the COVID-19 pandemic.
Fuel demand is rising around the world as travel restrictions end. Analysts believe global demand will recover to pre-pandemic levels some time in 2022.
Brent crude oil, the international benchmark, last week topped US$76 per barrel, the highest since Oct 2018, before pulling back a little.
At that level it already hit the forecast for $75 in the third quarter that investment bank Goldman Sachs made in February. At the time $75 was considered an aggressive outlook.
Goldman Sachs now sees the price averaging above $80 in the third quarter with the potential for jumps higher. Other analysts agree.
Crude oil demand will likely continue to recover in step with the global economy. And economic growth depends on the roll-out of COVID vaccines and their ability to control the more transmissible variants that are becoming prevalent.
Matching oil supply to this rising demand will depend in part on what the OPEC+ alliance decides to do.
OPEC+, which is the Organization of the Petroleum Exporting Countries and associated exporters such as Russia, is debating how quickly to end production cuts members agreed to last year at the peak of pandemic lockdowns.
Initially, the group curtailed 10 million barrels per day (bpd), but is now at 5.8 million bpd.
The plan advanced by Saudi Arabia is to continue restoring production by 400,000 bpd each month for the rest of this year, but some curtailment would continue through 2022.
Each member would rebuild production based on a historic base line.
But the United Arab Emirates, normally an ally of the Saudis, rejected the plan.
In recent years it invested heavily in production. Capacity is now significantly higher than the base line and so it says it should be able to add more production than what the formula would allow.
The UAE wants adjustments to the formula to allow it to pump more and is against extending the production curtailments into 2022.
Analysts say the UAE sees a future where renewable, low carbon energy sources start to take market share from crude oil and so wants to produce as much as it can now to avoid having a stranded resource in the future.
Analysts also say the UAE’s rebellion is motivated by its wariness of Saudi efforts to increase economic and political influence over the region. UAE leaders worry this will erode their position.
Though geographically smaller than Saudi Arabia, the UAE’s major cities, Dubai and Abu Dhabi, with their soaring skyscrapers, vast shopping centres and seaside resorts, are powerhouses when it comes to business, shopping and tourism.
The UAE has recently separated itself from the Saudis by ending its involvement in the Yemen civil war and by formally recognizing Israel.
The UAE-Saudi disagreement caused the OPEC+ meeting to break down last week, leaving the oil market in an uncertain state.
One potential, but I think unlikely, result is that OPEC’s discipline breaks down. Producers could quickly ramp up production to capture market share, leading to a price war.
However, the price war between the Saudis and Russians last year that contributed to the oil price falling below zero in April is fresh in producers’ minds and they would want to avoid that.
It is more likely a compromise will be found allowing OPEC+ to rebuild production and exports in a disciplined manner. This would lessen the potential for wild swings, up or down, in crude prices.
Another issue affecting global supply and prices is the Iran nuclear talks aimed at getting Iran to agree to new restrictions.
If there was a new agreement and the U.S. lifted sanctions, it would allow Iran to increase its oil production and exports.
Oil supply and prices will also be influenced by non-OPEC+ producers.
The U.S. saw production peak at 13.1 million bpd in 2020 just before the country began to shut down because of the pandemic. Production fell below 10 million bpd a few times during the pandemic.
In the first week of July, it had recovered to 11.3 million and if oil prices continue strong, expect to see more drilling in the U.S., leading to larger production by the end of the year.
Canada’s oil production was around 4.8 million bpd at the start of the pandemic and fell to 3.96 million in April 2020, but had fully recovered by the beginning of this year.