Oil Futures Reverse Up on IEA Demand Outlook, China Data

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Bolstered by stronger-than-expected trade data out of China, oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange reversed higher in early trade Tuesday on an upbeat demand forecast from the International Energy Agency for the second half of the year, that they see leading to a quickly tightening global oil market and falling oil inventories despite the uncertainty surrounding an OPEC+ deal to raise production next month.

In its monthly Oil Market Report released this morning, IEA said oil inventories held by countries that are part of the Organization for Economic Cooperation and Development fell far below the pre-COVID 2015-2019 average last month, underpinned by improved demand fundaments and slow return of global oil production. Global oil demand is estimated to have surged 3.2 million barrels per day (bpd) at the start of the summer to 96.8 million bpd, with additional gains expected in the third and fourth quarters. The agency, however, acknowledged that rising COVID-19 infections in major economies, including the United States and the European Union, present a downside risk for the forecast.

On the supply side, the agency expects a gradual return of OPEC+ barrels to the market, calling on production from the 23-nation alliance to rise by 1.9 million bpd in the third quarter to 42.8 million bpd before reaching 44.1 million bpd during the final three months of the year.

"World oil markets are on edge with OPEC+ negotiations to boost supply now in deadlock. Oil prices reacted sharply to the OPEC+ impasse last week, eyeing the prospect of a deepening supply deficit if a deal cannot be reached," said IEA.

The agency warns should OPEC+ maintain production cuts at July's level, the global oil market would tighten significantly as demand rebounds from last year's COVID-induced plunge. The overhang in global oil stocks that built up last year has already been worked off, with OECD industry stocks now well below historical averages.

Oil traders, meanwhile, remain in the dark over the future of OPEC+ supplies for the remainder of the year after a disagreement between Saudi Arabia and the United Arab Emirates blocked a tentative deal to raise production quotas next month.

In broader markets, global equities advanced and U.S. dollar strengthened against foreign currencies after stronger-than-expected trade figures out of China suggested solid global demand growth amid easing quarantine measures. China's exports in dollar terms rose 32.2% in June from a year earlier compared with 27.9% growth in May. Analysts expected a 23.1% monthly increase.

Stocks on Wall Street look for a mixed open Tuesday ahead of this morning's release of U.S. consumer price index for June, with economists expecting the monthly price increase to drop to 0.5% from 0.6% in May and 0.8% in April, and for the annual rate of increase to fall below 5%.

Last month's expected drop in the headline inflation rate should be followed by further declines in the third and fourth quarters. Should CPI for June come above expectations, this would test Federal Reserve's assumption that the recent inflation surge is temporary and triggered by the economy's reopening rather than material and labor shortages. Last year's March and April lockdowns led to a collapse in consumer prices as consumers at the time avoided all but essential purchases.

In early trade, NYMEX August West Texas Intermediate futures was up $0.25 at $74.35 per barrel (bbl) after trading as high as $74.74 bbl overnight, and the international crude benchmark Brent contract for September delivery added $0.36 to $75.52 bbl. NYMEX August ULSD futures gained 1.1 cents to near $2.1610 gallon and front-month RBOB futures edged higher to trade near $2.2850 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges