2. FOMC Meeting: Economic Inflection Point

Oil prices rose early on Thursday to their highest level in six weeks as a brighter outlook on the American economy and oil demand offset bearish demand prospects from the COVID crisis in India. WTI Crude closed up $1.15 at $65.01, and Brent Crude closed at $64.87 dn $.14 a barrel mark.

A weaker U.S. dollar today also added fuel to the oil rally this week, which had accelerated on Wednesday when the EIA reproted a small inventory build of 100,000 barrels for the week to April 23 and an average gasoline production of 9.6 million bpd, up from 9.4 million bpd in the previous week. In middle distillates, the EIA estimated an inventory draw of 3.3 million barrels for the week to April 23. U.S. refinery utilization rates also rose last week, to 85.4 percent from 85.0 percent in the previous reporting week, as per EIA data.

The oil market saw another bullish factor for oil demand in the Federal Reserve’s statement from Wednesday that the U.S. economy is accelerating.

“Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened,” the Fed said in its FOMC statement, adding that it would continue with its easy monetary policy to support the economy and the flow of credit to U.S. households and businesses.

The signs of strengthening the U.S. economy and oil demand trumped on Thursday concerns about the health crisis in India, which could offset some of the demand rebound elsewhere.

Rystad Energy warned on Wednesday that the COVID crisis in India could disturb the nearly balanced global oil market, which could see a surplus of oil supply of as much as 1.4 million barrels per day (bpd) in May amid a sizeable loss of demand from the world’s third-largest oil importer.

Goldman Sachs, however, continues to believe that the market will take India’s crisis in its stride and will realize the biggest jump ever over the next six months.

Meanwhile, BP Plc Chief Executive Officer Bernard Looney said China’s oil demand is above pre-pandemic levels. The market is “in a position now e the optimism is there, but it appears to be heavily priced in,” said Edward Moya, senior market analyst at Oanda Corp. The OPEC+ decision to “skip the ministerial meeting shows that the energy market is in pretty good shape right now. But if new risks emerge, we’ll see how sensitive the market is.”

U.S. benchmark crude futures are up more than 6% so far this month amid signs of a consumption recovery in some parts of the world. Russian Deputy Prime Minister Alexander Novak said Tuesday that there is optimism in the global oil market and global mobility is increasing. Meanwhile, shipping giant A.P. Moller-Maersk A/S raised its earnings guidance citing surging demand for its services, underscoing a boom in global trade.

The uneven pace at which the world’s economies are emerging from their pandemic-driven slump has given rise to dislocations in crude flows. Canadian oil sellers have sent exports on rare voyages to the U.S. West Coast this month as the U.S. makes progress in its vaccine rollout. But at the same time, West African crude exports to Asia are poised to drop to their lowest since October as shipments to India slump.

“You’re seeing incredibly strong demand in America and China,” said BP CEO Bernard Looney in a Bloomberg Television interview. “America is almost back to where it was. The vaccines are going to kick in now in Europe. Then of course the question is what happens in the rest of the world.”

Gains in U.S. benchmark crude futures on Tuesday outpaced those of its global counterpart. Brent’s underlying market structure softened, with the premium of the nearest contract narrowing against the following month. Meanwhile, the discount of WTI’s front-month contract to Brent’s was the smallest in more than a week. “The broad expectation in the market here is that North America is going to out Gains in U.S. benchmark crude futures on Tuesday outpaced those of its global counterpart. Brent’s underlying market structure softened, with the premium of the nearest contract narrowing against the following month. Meanwhile, the discount of WTI’s front-month contract to Brent’s was the smallest in more than a week. “The broad expectation in the market here is that North America is going to outperform much of the world, at least over the next quarter or so,” said Bart Melek, head of commodity strategy at TD Securities. “That should see WTI perform somewhat better” on a relative basis to Brent.

Optimism around a global recovery is being driven in part by a strong rebound in China — although an oil spill outside Qingdao could threaten operations at the country’s biggest crude-receiving terminal. Meanwhile, South Korea’s economy recovered at a stronger pace than expected last quarter, as investment picked up with export growth.

In the U.S., crude inventories are expected to have fallen last week, according to a Bloomberg survey. The industry-funded American Petroleum Institute will report supply figures later Tuesday ahead of the U.S. government’s weekly storage data on Wednesday.

The Joint Technical Committee of OPEC+ is concerned about the growing case numbers in India, Japan, and Brazil, Reuters sources said on Monday. The Joint Technical Committee, or JTC, is responsible for assessing oil market fundaments. It is also tasked with monitoring which member countries are complying with the production cut quotas and which are not. The JTC is not changing its oil demand outlook at this time, but the group is keeping an eye on surging coronavirus cases in some substantial oil importers.

India, for one—the world’s third-largest oil importer—has hit another high in the number of its new coronavirus cases. It is the fifth day in a row for such record-setting, and with more than 350,000 new cases reported on Monday, the Asian nation has hit a world record for the greatest number of new cases. For India, this is a health crisis of immense proportions. For the global oil markets, it means a slower recovery. India imports more than 4 million barrels per oil every day.

Japan—the world’s fourth-largest oil importer and fifth-largest oil consumer—is also struggling with an increase in the number of new coronavirus cases, as it has been slow to roll out vaccines. Japan is also one of the world’s largest LNG importers.

The JTC, which is meeting prior to the full ministerial meeting that will take place later in the week on Wednesday, is still weighing the impact of various lock downs on the oil markets. Just one month ago, the OPEC+ pane revised downward its oil demand estimates at Saudi Arabia’s prodding, just before the group decided to ease production quotas for its members. Brent Crude closed at $65.65, down $0.46 on the day. WTI Crude closed at $61.91 down $.23.

In early April, OPEC+ decided to gradually increase collective oil production by 350,000 bpd in each of May and June and by more than 400,000 bpd in July. Additionally, Saudi Arabia will also gradually ease its extra unilateral cut of 1 million bpd over the course of the next few months, beginning with monthly production increases of 250,000 bpd in each of May and June.

Currently, the market is balanced, Novak said today, adding that if a deficit occurs, OPEC+ could always decide to pump more. The ministers of the alliance are discussing a short format for next week’s meeting by scrapping the meeting of the ministers and leaving only the monitoring committee meeting, an OPEC source told Russia’s TASS news agency. Currently, both meetings are planned to be held on April 28, Novak said today. “I think the next meeting will be just monitoring the market,” an OPEC+ source told Reuters on Wednesday, suggesting that the gathering next week would only be a formality and a technical meeting to take stock of the market balances and compliance with the cuts.

Last week, Brent Closed at $66.77, up by 5.72% w/w, while WTI Closed at $62.44 down $.9400.  Prices have been supported by multiple factors including a weaker dollar, strong economic data from China, an improved economic growth forecast from the IMF, and strong demand data from the United States.

Macroeconomic outlooks and fears of inflation are supporting prices – Given the impact of recent economic stimulus, the IMF doubled its global growth forecast in 2021 to 6% including 6.4% predicted growth in the US, 4.4% in Europe, 8.4% in China, 12.5% in India, and 6.7% in other emerging markets. Furthermore, the Chinese economy grew by 18.3% y/y, 0.6% Q/Q, in Q-1 this year, though from a low base. Chinese exports remain strong in March which is fuelling optimism for oil demand. Chinese exports were seen 30.6% higher compared with their level last year, despite having a slightly slower pace of growth in March compared with February. This is combined with improving manufacturing index data, 51.9 in March, which suggests robust industrial activity. U.S. bond rates are also rising despite improving job data, an indication of fears of changing the Fed policy on interest rates that may be hiked to control expected inflation. Crude prices are affected by emerging fears of inflation, which is visible through rising bond prices.

Despite the lock down measures in the EU, Google mobility data shows an increasing number of visits to retail and entertainment venues, suggesting that fuel demand may not be as bad as previously thought. In the meantime, vaccination campaigns are advancing, and the UK has already initiated its first phase of re-opening its economy.

Additional factors supporting prices include the upward revision of demand forecasts by the IEA and OPEC along with bullish inventory data published by the EIA. OPEC raised its demand growth forecast in 2021 by 70,000 bpd from earlier forecasts to a total of 5.95 million bpd, while the IEA revised up their demand growth forecast by 230,000 bpd to 5.7 million bpd.

Commercial crude oil inventories dropped for the second consecutive week, by 5.9 million barrels, following four weeks of continuous build-ups, standing currently at 492.4 million barrels. If the current demand trend continues, we expect commercial inventories to drop to around 450 million barrels by July. On the other hand, rising covid cases in major consuming countries such as India and Brazil, and the suspension of Johnson & Johnson vaccines in the U.S. resulted in demand uncertainty in the markets which continues to limit crude prices.

Aramco expansion projects set to raise production capacity by 2024 – Aramco is said to have given the green light for its capacity expansion projects in three offshore fields, expecting to add an additional 1.15 million bpd to the company’s maximum sustained production capacity of around 12 million bpd. According to Argus, 38 companies were awarded contracts to carry out the expansion in the Zuluf, Marjan, and Berri fields by 600,000 bpd, 300,000 bpd, and 250,000 bpd, respectively. The size of the investment is estimated to be around $18 billion and is seen as the largest investment in the upstream sector since the pandemic. Aramco is said to be targeting a total production capacity of 13 million bpd by 2024.

US demand data continues to strengthen – U.S. demand data continues to show strength, and product demand is almost back at 2019 levels. Last week, the EIA showed that U.S. petroleum product demand stood at 20.33 million bpd including 8.90 million demand for gasoline. Furthermore, U.S. refinery input is just above 15 million bpd, only 1 million lower than its level before the pandemic.

While demand continues to pick up, U.S. oil production continues to lag behind 2019 levels. Total production of liquids is seen as almost unchanged since November 2020, ranging between 10.9-11.1 million bpd. We remain highly doubtful of any projected rise in the level of U.S. production in 2021 in spite of higher prices and a rising rig count.