Commodities Corner: OPEC+ provides an oil ‘supply cushion’ as coronavirus delta variant threatens demand

United States

Major oil producers are betting that the world will need more crude supplies through next year, even as the spread of the coronavirus delta variant clouds the outlook for the economic recovery and demand for gasoline.

The OPEC+ decision “more or less gives crude oil a stronger ceiling” around $ 80 a barrel, one that will be difficult to break above, said Patrick De Haan, head of petroleum analysis at GasBuddy, a travel and navigation app. He referred to the deal as a “positive development” given recent strength in domestic gasoline demand.

The Organization of the Petroleum Exporting Countries and their allies — known as OPEC+ — agreed on July 18 to raise their overall production by 400,000 barrels a day on a monthly basis starting in August. The deal reached last week contributed to a sharp drop in oil prices the next day.

The group expects to continue the output increases until the 5.8 million barrels per day of production curbs introduced last year are phased out.

Read: Why the oil markets likes the OPEC+ but prices don’t show it

The delta variant, meanwhile, has seen a surge in coronavirus cases in many countries, pulling prices down on concerns about the economic recovery. In the future, the variant could change the direction OPEC takes, says De Haan.

U.S. crude prices holding at the $ 67 range could prompt a fall in gasoline’s national average to $ 3.05 a gallon in roughly two weeks, he says. On July 21, the gasoline price stood at $ 3.16, according to GasBuddy.

The OPEC+ agreement “provides an immediate supply cushion as demand increases in the near term,” says Matt Muenster, lead economist at strategic transportation solution provider Breakthrough.

He admits there is a “delicate balance to strike because countries presently battling Covid variants are the countries we expect to experience vaccination growth in coming quarters,” which would lead to increasing demand for crude and refined products. That is a key reason why OPEC+ will continue to meet monthly and evaluate the market, he says.

Baseline production levels will also increase starting May 2022 for the United Arab Emirates and other OPEC+ countries. A disagreement between Saudi Arabia and the U.A.E. led to an abrupt end to negotiations in early July.

“Supply has been a hard-to-predict challenge, and demand has been fairly healthy, though a bit less ‘spicy’ than anticipated,” De Haan says.

Oil “supply has been a hard-to-predict challenge, and demand has been fairly healthy, though a bit less ‘spicy’ than anticipated.”

— Patrick De Haan, GasBuddy

Oil demand is expected to reach pre-pandemic levels next year, with demand growth at 3.3 million barrels per day to 99.9 million barrels per day, according to an OPEC report.

The biggest influences on U.S. oil demand are travel trends, says Ken Robinson, market research manager at workforce management and reimbursement platform Motus. He points to a rise in recreational driving, while many businesses have not seen a full return to the office.

He anticipates U.S. benchmark West Texas Intermediate and global benchmark Brent crude prices to see a roughly 10% correction over the next few months, in light of the output increases. On July 21, WTI futures CLU21, +1.19% CL.1, +1.19% settled at $ 70.30 a barrel, while Brent crude BRNU21, +1.15% BRN00, +1.15% stood at $ 72.23.

Rohan Reddy, research analyst at Global X, however, said a $ 70 to $ 80 range for WTI and $ 75 for Brent this year “wouldn’t be surprising” because the global economic recovery still has a lot of momentum.

Gasoline, meanwhile, is set to be the bigger winner with summer fuel demand, says Reddy.

Implied gasoline demand climbed past 10 million barrels per day for the week ended July 2, a record high based on government data going back to 1992.

More countries are expected to ease lockdowns, which will drive fuel demand, Reddy says. Gasoline prices may see further gains into August in peak travel season, then take a breather, he says.