With oil prices rallying, it is now time for Opec+ to regain market share | The National

With oil prices rallying, it is now time for Opec+ to regain market share | The National

The Opec meeting at the start of July faces quite a different mood from last year’s gatherings. After battling low prices, a coronavirus-induced slump in demand and a cautious recovery, the market’s alarm signals are now flashing orange. It is time for the producers’ organisation to move on to the next phase of the campaign.

The headline price is striking enough, with Brent crude at more than $76 a barrel on Friday – its highest level since late 2018, bringing it close to breaching a seven-year record.

However, there are plenty of other signs of market tightness.

The discount of US benchmark West Texas Intermediate to Brent now sits at $2, compared to $10 at the last peak in 2018. As American demand picks up while production remains subdued, there is less incentive to export surplus crude.

The premium between September and October WTI futures has widened to more than $1 a barrel, indicating that prompt supplies are strained.

The premium for immediate delivery over longer-dated futures, the situation known as backwardation, encourages traders to empty oil from storage to avoid receiving a lower price later.

Apart from China, surplus inventories built up earlier during the pandemic have almost dissipated. Stocks in developed countries are now below their five-year average before the pandemic. Major traders such as Vitol expect global demand to be back at pre-Covid levels by the second half of next year.

The global economy is picking up as key countries overcome the worst of the pandemic. The global composite purchasing managers’ index, a good advance indicator, reached its highest level in more than 15 years in May.

Manufacturing has led the recovery so far as people stuck at homes buy computers and make house improvements.

Now services are starting to pick up in the US and Europe as the pace of vaccinations rises – meaning more car travel to restaurants, malls and cinemas, as well as holidays by road and, increasingly, air.

Concerns remain over the new coronavirus variants, particularly the now-infamous Delta strain, the slow pace of vaccination in many parts of the world and the problem of reopening Asian countries such as Japan that managed to keep infection levels low but have little established immunity.