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.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.