Brent rallies to above $75 for first time in more than two years as market fundamentals tighten

The oil benchmark is up 40% this year as the world's largest economies rebound from the pandemic

A storage tank in the Permian Basin in Loving County, Texas. The election of Ebrahim Raisi as Iran's new president is likely to complicate ongoing talks between Washington and Tehran to restore the nuclear deal. ReutersShow less

Brent, the international benchmark for more than half of the world’s oil, rallied to above $75 per barrel during early trading for the first time since 2018, as the world's largest economies rebound from the pandemic and US-Iran talks stall, delaying a return of Iranian crude to the market.

Brent later pared its gains, declining 0.2 per cent to trade at $75.75 per barrel at 4.57pm UAE time. West Texas Intermediate, which tracks US crude grades, fell 0.38 per cent to reach $73.38 per barrel.

The benchmarks softened their earlier rally amid indications that Opec+, the group led by Saudi Arabia and Russia, plans to add more supply in August.

"Reports that Opec+ is already discussing, ahead of its scheduled meeting, to increase its output from August indicates that the demand-supply gap is already becoming an issue and that the alliance is working on a plan to tap that deficit," said Louise Dickson, oil markets analyst at Rystad Energy.

Global oil demand is expected to return to pre-Covid levels by the end of 2022, with the rebound supported across sectors and products, the International Energy Agency said earlier this month.

Demand for crude is expected to grow this year by 5.4 million barrels per day and a further 3.1 million bpd to average 99.5 million bpd, according to the Paris-based agency.

Oil's immunity to price volatility in either the commodity or currency markets strongly suggests that demand is high and rising, said Jeffrey Halley, senior market analyst, Asia Pacific at Oanda.

"By default, that indicates that the global recovery in the real world remains on track even as other asset classes chase their tails," he added.

The election of Ebrahim Raisi as Iran's new president this week may complicate the ongoing dialogue between Washington and Tehran to restore the nuclear deal.

Iran was Opec’s fourth-largest producer before the resumption of US sanctions by the Trump administration.

"Talks between Iran and world powers have not progressed enough to have the US in actual attendance," said Edward Moya, senior market analyst, the Americas at Oanda.

"The longer talks drag, the further Iranian sanction relief is delayed. Iranian output is expected to increase in the third quarter, but if no breakthroughs are made over the next few weeks, that could be in jeopardy," he added.

Middle East producers are bullish about oil's prospects. Iraq, Opec's second-largest producer expects oil to reach $80 per barrel.

In a report on Monday, Bank of America said tighter supply and demand balances in 2022 could push oil to $100 a barrel, with Brent poised to average $75 next year.

"A combo of factors could push oil to $100 next year ... there is plenty of pent up mobility demand after an 18 month lockdown. Second, mass transit will lag, boosting private car usage for a prolonged period of time. Third, pre-pandemic studies show more remote work could result in more miles driven, as work-from-home turns into work-from-car," the BofA said.

"In short, demand is poised to bounce back and supply may not fully keep up, placing Opec in control of the oil market in 2022."