The recovery in oil demand has been on the cards for a while now and the US benchmark for oil prices, West Texas Intermediate (WTI) is now trading near the $69 mark – a high not visited since October 2018.
Brent crude, on the other hand, is hovering above $71 as bulls managed to push through major psychological resistance level at $70.
With the current success of vaccination rates across the world and the reopening of the global economy, oil consumption and demand are more than likely to soar over the third quarter.
Therefore, another rally in oil prices and a breakout is more a matter of when – not if.
Supply and demand
Also, with a robust demand recovery over the third quarter, analysts are now concerned that demand may be outgrowing supply instead.
In order to keep oil prices stable and oil producers profitable, OPEC+ had proceeded with historic production cuts reaching several millions of barrels per day in April 2020, which helped counter the pandemic’s fallout on the oil markets.
However, with economic activity returning to a semblance of normalcy, the alliance of OPEC and non-OPEC partners is now tasked with ramping up production in order to support the growing demand.
Oil investors, traders and speculators have been eagerly anticipating the OPEC+ meeting, which took place this Tuesday.
The meeting was scheduled to discuss strategy regarding production hikes as well as Iran’s return into the fold.
Iran is one of the world’s largest oil producers, however, due to sanctions related with the 2015 nuclear deal, it has been restricted from exporting its oil.
Though world powers have been in talks with Iran since April, it’s still uncertain whether a deal can be reached, however, if a deal is indeed struck, Iran’s return could translate to an additional million or two of oil barrels per day for the global supply.
Following the meeting, oil benchmarks soared to two-year highs as OPEC and its allies confirmed a cautious and gradual return to pre-pandemic production levels.
Nonfarm payrolls’ impact on oil prices
The monthly Nonfarm payrolls (NFP) report tracks the number of new jobs added in the US labour market in the previous month and is the biggest market-moving economic event across the currency and commodity markets.
While the NFP isn’t considered a great indicator for oil prices, it can provide insights into the future market direction.
Put simply, if the NFP figures are positive, we can assume that the economy is growing, which typically means higher industrial energy consumption as well as increased transportation.
As such, a strong NFP coupled with increased oil demand could trigger a rally in oil prices.
April’s NFP (released in May) surprised the markets with a huge miss as only 266,000 jobs were added compared to the forecast of nearly one million.
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