Oil prices rose above $75 a barrel as OPEC and a Russia-led group of producers met to weigh surging demand from the industrialized world.
The meeting of the Organization of the Petroleum Exporting Countries comes at a time when some of the historical dynamics of the oil markets have been thrown upside down by the pandemic. Demand growth from the developed world, which for years has stagnated, is on a tear as it emerges furiously from Covid-19 lockdowns. Meanwhile, the developing world—the source of almost all new oil demand in years past—is still sputtering.
A week ago, OPEC and allied producers led by Russia were leaning toward boosting production by half a million barrels a day, with more additions possible later in the year, The Wall Street Journal reported.
Going into formal deliberations being held remotely, Saudi Arabia, OPEC’s de facto leader, and Russia agreed Thursday to take up a proposal that includes a boost of about half a million barrels a day starting in August, according to people familiar with the talks, and then gradually increasing so-called OPEC+ output by a total two million barrels through December.
Negotiations over the details of the deal are still underway, and Saudi Arabia has in recent meetings changed course at the last minute. Another wrinkle: A deal may be conditional on the status of Iran sanction talks with the world powers. Tehran is negotiating a resumption of an Obama-era deal in which it would curb its nuclear ambitions in exchange for a lifting of sanctions on oil sales.
Ahead of the meeting, U.S. crude rose more than 3%, topping $75 a barrel for the first time since 2018 and approaching $76 a barrel. Brent crude, the international benchmark, was up almost 2%, approaching $76 a barrel. In a sign that U.S. demand is playing a key role in prices, U.S. crude has outstripped Brent prices, reducing a long-standing gap between the two benchmarks. That gap was less than $1 a barrel early Thursday, its narrowest since 2016, according to FactSet.
Accelerating vaccination drives in the U.S. and Europe are boosting global economic activity—and by extension, demand for oil. OPEC data showed markets needed two million barrels a day of extra oil this year. Meanwhile, the Delta variant of the coronavirus has wreaked havoc in India, an anchor of oil-demand growth in normal times. China, too, is seeing signs of economic softening as consumers pull back amid isolated outbreaks there. The country is also struggling with supply bottlenecks that have hampered production.
OPEC has signaled it expects the surge in demand from industrialized countries to be temporary, so far standing by a forecast last year that rich-country demand won’t ever hit pre-pandemic levels again. It cited an accelerated embrace of alternative energy, decades of fuel-efficiency initiatives and slow or stagnant population growth.
For now, though, the thirst for oil from richer countries has become the key, short-term demand driver. OPEC expects oil demand in industrialized nations to increase by 2.7 million barrels a day in 2021, up 6.3%. More than half of that growth will come from the U.S., at 1.5 million barrels a day, it said. The trend will accelerate in the second half, with a consumption boost of 3.1 million barrels a day.
IHS Markit expects global demand in the third quarter to jump by about 7 million barrels a day from the first quarter of the year, driven by North America and Europe, at a clip of 10% and 15%, respectively. That should get 2021 oil demand to some 99.1 million barrels a day in the third quarter, the consulting firm forecasts, still down from the 102 million barrels it estimates the world consumed in late 2019. It expects the world to hit that threshold by the middle of next year.
While the fast-changing demand picture presents a forecasting challenge, the size of the collective cutbacks OPEC+ enacted early last year leaves it with more ammunition than usual to calibrate supplies. It cut 9.7 million barrels of production as the scale of the pandemic became clear, and has since restored more than 4 million of that. That still gives it as much as 5 million barrels a day, or about 5% of pre-pandemic demand, to give back eventually.
“OPEC+ has a degree of market power that it has rarely had for many decades, at least temporarily,” said Jim Burkhard, head of crude-oil market and energy and mobility research at IHS Markit.
For now, the oil world is in a two-speed recovery. In the first three weeks of June, crude shipments arriving at Indian ports came in at about 3.9 million barrels a day, down about 280,000 from the prior month, according to market intelligence firm Kpler, which tracks vessels globally.
In May, Indian Oil Corp., the country’s biggest refiner and fuel retailer, said it had cut its processing capacity by 12 percentage points. Its smaller rival, Bharat Petroleum Corp., slashed capacity by 16 points and was forced to defer several cargoes.
China, meanwhile, which has also faced new, localized Covid-19 outbreaks, is planning to keep its pandemic border restrictions in place for at least another year as officials fret over the emergence of new variants.
“China oil imports have been weak,” said Anoop Singh, the Singapore-based head of tanker research at shipbroker Braemar. He said refiners have been largely tapping into inventories. As an indicator of persistent weakness, one-year supertanker rentals now cost a third less than a year ago, according to Braemar.
In the U.S., by contrast, demand is back for gasoline for road trips and jet fuel for surging domestic air travel. The nation’s gasoline demand could rise some 600,000 barrels a day over the next two months, far outpacing market estimates. Only on the West Coast is fuel consumption still trailing 2019 levels, traders said.
“The oil market has been healing faster than people have been ready to give it credit for,” said Saad Rahim, chief economist at commodities trader Trafigura.
The number of travelers moving through Transportation Security Administration checkpoints has climbed above 2.1 million on a few days in late June, a few hundred thousand below 2019 levels and almost double the traffic in late March.
Traders said Gulf Coast oil refineries are turning crude into gasoline and other fuels at the fastest rate since January 2020. The boost in refinery runs has constrained northward flows of crude to the nation’s main storage hub in Cushing, Okla. That could drain inventories there. Cushing inventories have dropped almost one-third this year, according to the Energy Information Administration.
—Joe Wallace contributed to this article.
Write to Benoit Faucon at benoit.faucon@wsj.com, Collin Eaton at collin.eaton@wsj.com and Summer Said at summer.said@wsj.com
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