Oil’s Rally Powers On as Demand Optimism Outweighs Iran Concerns

(Bloomberg) -- Oil extended gains from the highest close in more than two years as optimism over burgeoning U.S.-led demand outweighed concern that Iranian supplies will jump should sanctions on official exports be lifted.

West Texas Intermediate rose 0.5% after settling at the highest finish since October 2018, while Brent neared $70 a barrel. With the U.S. economy recovering from the pandemic, more drivers taking to the roads and stockpiles are drawing. Most-active prices in New York are set for a sixth daily rise.

That positive picture is being clouded, at least for now, by concerns that talks in Vienna between Tehran and world powers to revive a nuclear accord will pave the way for the lifting of U.S. sanctions. Should an agreement be reached, Iranian crude shipments may pick up just as the Organization of Petroleum Exporting Countries and its allies relax collective curbs on exports.

Oil is on course for another monthly gain in May, the fourth of five this year, as investors wager that progress in combating the Covid-19 pandemic will spur energy consumption. The recovery is most evident in the U.S., Europe and China, while virus waves continue to roil economies in parts of Asia and Latin America. The rally in crude is part of a broader advance in commodities.

“The momentum is there,” said Howie Lee, an economist at Oversea-Chinese Banking Corp, adding that the recovery in U.S. and Europe is outweighing the concerns over parts of Asia. The market believes the rebound remains strong, and it “will be able to absorb whatever excess supply comes in,” he said.

The vaccine-aided pickup in U.S. demand comes ahead of the summer driving season, which gets under way from the upcoming Memorial Day weekend. Data this week showed declining inventories of crude and gasoline, and that drivers are traveling almost as many miles on interstates as they did in 2019.

Ministers from the OPEC+ alliance, led by Saudi Arabia and Russia, are set to meet on June 1 to assess the global market and their production policy. All but four of 24 analysts and traders surveyed by Bloomberg predicted they will ratify an 840,000 barrels a day increase scheduled for July, completing a three-part process to revive just over 2 million barrels this summer.

Iran could potentially add 2 million barrels a day of crude into the market if a deal is struck, according to Lee. “It will be a dampener on prices for sure, but I don’t think its enough to cause a sustained downtrend,” he said.

The market’s positive outlook is reflected in WTI’s widening longer-term spreads. The price of the U.S. benchmark for December 2021 was $4.93 a barrel higher than futures for the same month in 2022. The differential has expanded by almost $1 this week to hit the highest since mid-March.

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