Oil prices rallied yesterday, with ICE Brent trading back above US$72/bbl, whilst NYMEX WTI broke the US$70/bbl barrier for the first time since October 2018. API numbers overnight showed that US crude oil inventories declined by 2.11MMbbls over the last week, which has provided a further boost to oil this morning. Demand optimism continues to support the complex, with global Covid-19 cases continuing to trend lower after peaking in late April. In addition, the US eased its Covid-19 travel warnings for a number of countries, and while this is unlikely to lead to an immediate rebound in international travel, it is clearly a step in the right direction. We believe that the demand outlook will remain supportive for prices as we move through the year. We are of the view that significant further upside is capped by the more than 6MMbbls/d of spare capacity that OPEC+ is holding from the market. There will likely be more pressure on the group in the coming months to bring more of this capacity back to the market, particularly if we remain in the current price environment.
What has been evident in recent weeks has been the relative strength in WTI, with the WTI/Brent spread seeing its discount narrow to just US$2.30/bbl, the narrowest it has been since November last year. This does reflect a relatively more constructive US market, where crude inventories have been trending lower since March, and refinery utilization rates are at their highest levels since February 2020. A further narrowing in the spread could see crude oil exports from the US come under pressure.
Sticking with the US, and the EIA yesterday released its latest Short Term Energy Outlook, where some slight revisions were made to oil output forecasts for 2021 and 2022. The EIA expects that US oil output will fall less than previously expected in 2021, with it forecast to fall by 251Mbbls/d YoY to average 11.07MMbbls/d, compared to a previous forecast of 11.01MMbbl/d. As for 2022, growth expectations have been slightly lowered, with output next year forecast to grow by 722Mbbls/d to average 11.79MMbbls/d, lower than the 11.84MMbbls/d previously forecast.