While large parts of the commodities complex came under pressure yesterday, oil bucked the trend and continued its move higher. ICE Brent broke above US$74/bbl, and traded to levels last seen back in April 2019. Sentiment is likely to remain positive today, with the API reporting overnight that US crude oil inventories fell by 8.54MMbbls over the last week, much more than the roughly 2.5MMbbls decline the market was expecting. If the EIA reports a similar fall in inventories later today, it would be the largest decline since January.
The strength in oil has been led by the US, with the WTI/Brent discount quickly closing in on US$2/bbl, having traded a little over US$4/bbl in April. Refinery runs in the US have picked up considerably, back to levels last seen in January 2020, while crude oil output continues to hover around the 11MMbbls/d mark. These factors combined with lower imports (due to ongoing OPEC+ supply cuts) have helped to tighten up the US crude oil balance The narrowing in the WTI/Brent spread suggests that we should see US crude oil exports trending lower.
While the recent move higher in the oil market has been driven by optimism over the demand outlook, refinery cracks suggest that the rally in crude oil may be getting a bit ahead of itself. If the demand story was as optimistic as the move in crude oil suggests, you would think that the move higher in prices would have been led by the refined product market. However, in the US, both gasoline and heating oil cracks have come under pressure recently. We would have more confidence in this oil rally if these product cracks moved higher with oil prices.
If this strength is sustained until early next month, it only increases the likelihood that OPEC+ agree on some aggressive production increases when they meet on 1 July. With ICE Brent not too far away from the mid-$70s, it will become increasingly difficult for OPEC+ to continue to hold a sizeable amount of supply from the market. After the last OPEC+ meeting, Russian oil producers made it pretty clear that they expect the group to increase output further from August. Even after taking into consideration the 2.1MMbbls/d supply increase between May and July, OPEC+ still have almost 6MMbbls/d of supply to bring back to the market, which should more than offset the expected demand recovery in the months ahead.