Oil Hits Highest Since October 2018 With Saudis Upbeat on Demand

(Bloomberg) -- Oil resumed its advance, reaching the highest settlement in over two years with the OPEC+ alliance forecasting a tightening global crude market and a nuclear deal with Iran still up in the air.

West Texas Intermediate crude rose 2.1%, while global benchmark Brent settled above $70 a barrel for the first time since 2019. Prices rallied as members of the OPEC+ alliance sounded upbeat notes about the global consumption rebound. Saudi Arabia Energy Minister Prince Abdulaziz bin Salman said “the demand picture has shown clear signs of improvement,” while his Russian counterpart also spoke of the “gradual economic recovery.”

Adding further support, the prospect of an immediate resolution in talks to revive the 2015 nuclear accord has been delayed for now. Iranian officials said the Persian Gulf country and world powers are unlikely to reach a final agreement in the current round of talks, cooling speculation that sanctions on Tehran’s key oil exports might soon be lifted.

“People are looking more and more at a big travel season in the Northern Hemisphere, at least in Europe and the U.S.,” said Michael Lynch, president of Strategic Energy & Economic Research. “So the demand side looks good,” and with OPEC+ only gradually returning output and an Iran deal looking further off, “it looks like we could be in for a tight summer.”

A robust economic recovery in the U.S. and Europe has given the Organization of Petroleum Exporting Countries and its allies the confidence that markets can absorb additional barrels, with the producer group agreeing Tuesday to press ahead with an increase of 841,000 barrels a day in July, following hikes in May and June. That comes as the International Energy Agency signaled a speedier demand recovery than its previous estimates, seeing global oil demand in one year possibly rebounding to levels seen before the pandemic.

“The U.S. is coming back rapidly and Americans are taking onto the roads, and soon Europeans will be taking over to the roads as well,” Francisco Blanch, head of global commodities and derivatives research at Bank of America Global Research, said in a Bloomberg Television interview. “The market wants more barrels from OPEC and it probably needs more barrels from Iran. So at this point, the ramp up into year-end requires more production.”

The oil market’s structure was also showing signs of strength on Tuesday. The spread between WTI’s nearest two December contracts -- a favored trade for hedge funds to express views on the oil market -- rallied to its widest backwardation since the two contracts began trading, indicating tight supply. Down the curve, the spread between the December 2022 and December 2023 contracts has surged further above $3 a barrel in backwardation.

The oil glut built up during the coronavirus pandemic has almost gone and stockpiles will slide rapidly in the second half of the year, according to an assessment of the market earlier this week from an OPEC+ committee. At the forefront of the global demand recovery, the U.S. has been showing signs of solid travel patterns even before this past weekend marked the start of the traditional peak fuel consumption period. U.S. gasoline demand in week ended May 28 reached the highest level since start of pandemic to 9.534 million barrels a day, Descartes Labs said in survey based on movements of cellular devices.

“Sticking to increases planned at the April meeting is what the market needs,” Ann-Louise Hittle, Wood Mackenzie Ltd.’s vice president of macro oils, said in a note. “Demand growth is outpacing supply gains even with the agreed month-by-month OPEC+ production increases taken into account.”

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