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.
The key factor still depressing oil demand is the lack of air passengers.
The UK’s problems over its “traffic light” system and quarantine policies indicate how hard restarting mass international travel will be.
Aviation, which in 2019 consumed about 7.5 million barrels per day, is set to recover about 1.5 million bpd next year.
As and when restrictions are substantially eased, there will probably be an initial rush of leisure flights, even if business travel never returns to its pre-pandemic ways.
The planned "green recovery" in Europe and the US is not an immediate threat. Even though sales of petrol and diesel passenger cars probably reached their peak in 2017, and electric vehicles are rapidly gaining market share, this will have only a limited near-term effect on oil consumption.
The effect of climate policies and newly competitive renewables, battery-powered vehicles and others will have a big effect on global petroleum in the coming decades.
For now, the main effect is to discourage investment in new oil supply.
The usual characters among bank analysts are hitting the headlines by forecasting oil prices of $100 a barrel by the second half of next year. However, this depends critically on what Opec does. It will still have 6.9 million bpd in spare capacity in its pocket after July, according to the International Energy Agency's estimates.
Opec itself, ahead of its scheduled meeting on July 1, seems confident that it faces no major competition. Iran, an Opec member that is not subject to the current cuts, is the main wild-card, with US sanctions still holding back about 1.4 million bpd in exports.
Yet, there has still been no breakthrough in the US-Iran talks. It would take several months for any deal to be enforced and for more cargoes to be sold and arrive at destinations, even though some Iranian crude is floating in storage off Asian ports.
Opec’s regular monthly meetings mean it can monitor this situation without needing to pre-empt it.
Estimates for US production growth next year range from 0.5 million bpd to 1.3 million bpd. Canada, Norway, Brazil and new entrant Guyana are gaining too. Opec seems quite confident that US shale producers will never return to pre-pandemic levels of growth. Burnt twice, investors are demanding drillers return cash rather than grow aggressively.
However, the producers' organisation should be wary. They have written off shale at least twice before and it has demonstrated its resilience. A spell of prices at $100 a barrel will result in shale companies generating strong cash flows, and privately held producers will step in even if the public companies stay reticent. Shell, Occidental and others are selling off acreage that more aggressive companies could pick up.
The Opec+ alliance has succeeded better than anyone might have expected in pulling prices back from the brink. Its caution is understandable after such an unprecedented and scarring event, with a lot of uncertainty still ahead.
Apart from a brief pullback in March, prices have risen almost linearly since November, even as producers gradually brought back supply. As Saudi Arabia's Energy Minister Prince Abdulaziz has vowed repeatedly to surprise the market, Opec+ should not allow the oil price to become a simple one-way bet for traders and competitors.
With prices running ahead of recovery, now is the time for the organisation to be bolder in regaining its lost market share.
Robin M. Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis