International Oil Prices: Supply Increase VS Demand Recovery

[Asia Economy Reporter Song Hwajeong] Although global crude oil supply is gradually increasing, the market is expected to remain demand-driven due to the global economic recovery, leading oil prices to continue their upward trend in the second quarter.

Last week, international oil prices showed weakness. On the 9th (local time) at the New York Mercantile Exchange, the May West Texas Intermediate (WTI) crude oil price closed at $59.32 per barrel, down $0.28 (0.5%) from the previous session. It fell 3.47% since the beginning of this week. The spread of COVID-19 and concerns over crude oil supply pulled prices down.

Jeon Gyu-yeon, a researcher at Hana Financial Investment, said, "Global crude oil supply is gradually increasing," adding, "As the economy recovers and oil prices show a stable trend, oil-producing countries, led by the so-called Big 3 producers?the United States, Saudi Arabia, and Russia?are highly likely to increase crude oil production." At the April OPEC+ (Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC cooperating countries) meeting, OPEC members and participating non-OPEC oil-producing countries agreed to gradually reduce production cuts from May to July. Saudi Arabia also proposed to gradually reduce its voluntary production cuts of 1 million barrels per day and to stop voluntary cuts by July.

With many companies in the U.S. resuming drilling activities, U.S. crude oil production is also expected to gradually increase.

The key issue is how much the recovering global economy can drive crude oil demand. Researcher Jeon analyzed, "The fact that global crude oil supply is in a somewhat predictable phase over the next three months reduces supply-side uncertainties and increases the likelihood that international oil prices will move in line with crude oil demand." The International Monetary Fund (IMF) raised its global economic growth forecast for 2021 to 6.0% year-on-year in its April World Economic Outlook report. This is because the global economy is expected to continue a strong growth trend based on stimulus measures and vaccine distribution. In particular, oil demand is expected to expand as mobility increases, especially in countries with high vaccination rates.

First, it is necessary to see how well the market absorbs the gradual increase in OPEC+ crude oil supply starting in May. Researcher Jeon said, "If crude oil demand grows faster than the increase in supply during the economic recovery phase, there will be upward pressure on oil prices," adding, "The biggest uncertainty in the current oil market is the potential increase in crude oil supply due to Iran's return to the nuclear agreement, but excluding this risk, a demand-driven market is expected to form in the second quarter."

Concerns about oversupply due to Iranian crude oil are considered unfounded. Baek Young-chan, a researcher at KB Securities, explained, "The expansion of Iranian crude oil supply will not cause a sharp drop in international oil prices," adding, "It will take 6 to 12 months to resume oil exports, and considering the pace of demand growth, Iranian crude oil is actually needed." Researcher Baek added, "Because demand growth due to economic recovery is larger than expected, concerns about oversupply in the commodity market after last year's pandemic are unfounded."