Oil price continued to rally above $70 per barrel after Opec and its allies stuck to their plan to cautiously return oil supply in June and July while expecting fuel demand to rebound strongly as economies recover from the coronavirus pandemic.
Brent, the international benchmark for more than half of the world's crude, rose 1.2 per cent to $71.09 per barrel at 2:58pm UAE time. West Texas Intermediate, the key gauge for US oil, was up 1.03 per cent at $68.41 per barrel. Oil prices are up about 40 per cent year-to-date and are at their highest since October 2018.
"Oil prices are very much holding on to their gains ... no one wants to see the oil glut on the market, especially when the threat of the Indian coronavirus variant is still very much on the table," said Naeem Aslam, chief market analyst at AvaTrade.
Opec+ affirmed their plan to increase production by 2 million barrels per day between May and July, "in line with our and market expectations," Edward Bell, senior director, market economics at Emirates NBD said in a note on Wednesday.
“The producers’ bloc highlighted the improvement in oil market fundamentals, particularly the draw down in inventories and the economic recovery underway in many economics thanks to vaccine programmes.”
On Monday, the Organisation for Economic Co-operation and Development revised it global economic growth forecast to 5.75 per cent this year and 4.5 per cent in 2022 after output shrank 3.5 per cent in 2020. In April, the International Monetary Fund also raised its 2021 global outlook to 6 per cent.
Mr Bell expects a tight oil market in the coming months which will "keep oil prices elevated and feeding into inflation narratives globally."
Globally central banks and governments have pumped $25 trillion into economies to cushion the impact of the pandemic and protect companies and industries. That flow of money has raised concerns in the US and Europe about rising inflation. Rising oil prices raise manufacturing and transportation costs that increase the cost of consumer goods.
On Wednesday, the OECD said annual inflation in its 37-member countries increased to 3.3 per cent in April, the highest rate since October 2008 as annual energy prices rose sharply by 16.3 per cent during the month, compared with 7.4 per cent in March.
"We had pencilled in around a 1.5m bpd deficit in the second half of 2021 for headline oil market balances, and that incorporated Opec+ gradually increasing output. If they choose to refrain from increasing production then that deficit will widen further and add more upside volatility to prices," Mr Bell said.
Supply growth outside of Opec+ group is also expected to be limited compared to previous years. Talks to revive a 2015 nuclear deal with Iran that pave the way for the country to resume oil exports have also been delayed.
Though Opec+ did not officially comment on the outlook for Iran to return to the oil market "negotiations may have hit a stumble thanks to a release from the International Atomic Energy Agency, the UN’s nuclear monitoring agency, that Iran has not been forthcoming about the historic nuclear activity," Mr Bell said.
Brent is expected to trade at an average of $70 per barrel in the third quarter and fourth quarter and WTI at $65 per barrel during the same period, according to Mr Bell. The assumption is based on Opec+ attempting to keep oil markets tight and that Iran’s output would return gradually.
"As oil inventories continue to fall and oil demand keeps increasing thanks to vaccine rollouts, Opec and its allies remain in full control of the oil market," Giovanni Staunovo, commodity analyst at UBS, said.
"In our view the oil market will welcome additional supply from the group over the next few months."
On Wednesday, Norbert Rücker, head of economics and next-generation research at Julius Baer said the Swiss bank expects oil prices "to move well beyond" $70 per barrel towards mid-year.