Brent crude rose above $70 a barrel as Opec and its allies were set to decide whether to unleash more barrels into a tightening oil market or hold production back over persistent uncertainty linked to the pandemic.
The international oil benchmark rose more than 2 per cent to $70.69 a barrel on Tuesday morning in London, the highest level since March, ahead of a meeting later in the day of Opec+ producers led by Saudi Arabia and Russia.
Opec delegates and energy agencies have noted that the sharp drop in consumption, which was caused by governments imposing lockdowns and travel bans last year, is expected to reverse later on in 2021.
Mohammad Sanusi Barkindo, secretary-general of Opec, said on Monday: “There are many moving parts when it comes to factors affecting the global oil market, such as the pace of change during the pandemic.”
Several Opec delegates have said they expect ministers, at their virtual meeting, to push on with their previously agreed plan to slowly release more oil on to the market from July, totalling 2m barrels a day since May.
After a meeting of technical analysts from producer countries, it was determined that oil stockpiles by the end of next month will be below the average of 2015-2019, priming the way for higher output.
Producers are meeting on a monthly basis to decide on oil policy. It is unclear what their plans may be beyond July, but the group is likely to closely watch rising inflation concerns as well as progress with the economic recovery from the pandemic.
Last year Opec and Russia enacted record cuts of 9.7m b/d, which they have begun to gradually unwind as travel resumes and cities open up after months under lockdown. As of July, curbs will stand at just under 6m b/d.
“The market is now facing the exact opposite dilemma of April 2020. Instead of a spiralling downwards demand shock . . . producers now have just as delicate a task to bring back enough supply to match the swiftly rising oil demand,” said Louise Dickson at Rystad Energy.
Still, uncertainties remain. India, a big oil consumer, is in the throes of a new and more severe wave of the virus and all eyes are on the return of Iranian barrels to the market if a deal is reached with the US to lift sanctions.
Tamas Varga, an analyst at oil brokerage PVM, said the group had to be wary of investors’ reaction to rising inflation as well as the market’s ability to weather any increase in supply.
“The general worry is that higher producer and consumer prices will force central banks to taper their monetary stimuli and ultimately increase interest rates as the economies are overheating,” Varga said.
“The most likely outcome is to leave the agreed collective July production level at 38.1m b/d unchanged for August and possibly September and see if the market is able to absorb the extra Iranian barrels.”