“Commodity prices are in the spotlight because of rising inflation. Economies are reopening, so the demand for oil is increasing. However, expected oil demand in 2021 is still about five million barrels per day below 2019 levels. During the Covid-19 crisis, OPEC and other major oil producing countries such as Russia absorbed the drop in demand for crude oil by significantly reducing production. This removed 10% of supply from the market.
“In recent months production has slowly resumed. There are still over nine million barrels per day of spare capacity though. We expect OPEC will opt for a cautious approach to keep the market in balance. Above all it will be afraid of flooding the market with crude oil too soon. We saw confirmation of this earlier in the year when Saudi Arabia offered to unilaterally cut production by an additional one million barrels per day. That being said, in April it decided to increase production by 2.1 million barrels per day from May to July in anticipation of a pick-up in global economic growth.
“It will remain cautious however, thanks to other areas where supply could yet rebound beyond its control. This includes Iran, which is currently producing two million barrels of oil per day but could reach toward 6.5 million if a new nuclear deal is agreed with the US.
The US itself could also up its capacity as prices rise and shale oil producers come back into play. OPEC will be wary of restarting a price war with those producers that ended so badly for them in 2014 and 2015.