The oil-price rally may run out of puff

published 9 June 2021

Brent crude oil was trading at over $71 a barrel this week, its highest level since May 2019. The latest leg of the rally was due to Opec+, a group of major producers led by Saudi Arabia and Russia. The group has been collectively withholding millions of barrels of daily production from world markets in order to prop up prices. Last week they agreed to maintain their existing plan to unwind those curbs slowly rather than upping production more quickly to take advantage of higher prices.

The surge in crude has also been fuelled by optimism about economic reopening, says Patti Domm for CNBC. America has now entered its summer “driving season”. Reopening economies mean global demand should grow by seven million barrels per day (mbpd) between the first and third quarter, says Daniel Yergin of IHS Markit (worldwide consumption was 91mbpd last year). Even a return of Iranian supply – currently barred by US sanctions – to the world market would be absorbed by the ongoing demand spike. Oil is heading for “a hot summer”.

Not so fast, says The Economist. The higher prices go the more incentive US shale producers have to get back in the game. Floods of US shale oil have kept a cap on previous oil rallies. Higher prices will also encourage individual Opec+ members to cheat on their commitments by pumping more crude than they promised. Opec+ has been disciplined so far; it might not last.