(Bloomberg) -- Oil pared gains alongside broader market weakness after hitting the highest in two-and-a-half years with the OPEC+ alliance forecasting a tightening global crude market.
West Texas Intermediate crude futures dialed back a gain of as much as 3.8% from Friday’s close, while global benchmark Brent headed back toward $70 a barrel, a level it has failed to hold for a sustained period since 2019. The S&P 500 Index eased off session highs amid concerns the Federal Reserve may have to consider tighter policy sooner than expected.
Meanwhile, prices remained supported by the OPEC+ alliance’s upbeat calls for a global consumption rebound after Tuesday’s meeting. Saudi Arabia Energy Minister Prince Abdulaziz bin Salman said “the demand picture has shown clear signs of improvement,” while his Russian counterpart also spoke of the “gradual economic recovery.”
Crude and oil product inventories “have all been gradually eroding as time goes on,” said Tom Finlon, of Brownsville GTR LLC, a trading and logistics firm based in Houston. “The reduction in inventories is clear and noticeable, and it is unlikely there is any reason to think that trend is going to change.”
The producer group will press ahead with an increase of 841,000 barrels a day in July, following hikes in May and June, according to delegates. The oil glut built up during the coronavirus pandemic has almost gone and stockpiles will slide rapidly in the second half of the year, according to an assessment of the market earlier this week from an OPEC+ committee.
Traders also continue to follow the progress of negotiations between Tehran and world powers to revive the 2015 nuclear agreement, paving the way for increased oil supplies from Iran. The country said it hopes to fully reactivate the deal before the end of the government’s term in August, raising the prospect that a solution may not be found in the current round of talks in Vienna.
READ: Iran Now Hopes to See Nuclear Deal ‘Fully Revived’ by August
A robust economic recovery in the U.S. and Europe has given the Organization of Petroleum Exporting Countries and its allies the confidence that markets can absorb additional barrels. Although Covid-19’s renewed surge in parts of Asia is threatening demand there, OPEC+’s Joint Technical Committee sees crude stockpiles falling by at least 2 million barrels a day from September through December. The later a deal with Iran is signed, the greater the chances of oil-market tightness over the Northern Hemisphere summer.
“Sticking to increases planned at the April meeting is what the market needs,” Ann-Louise Hittle, Wood Mackenzie Ltd.’s vice president of macro oils, said in a note. “Demand growth is outpacing supply gains even with the agreed month-by-month OPEC+ production increases taken into account.”
The oil market’s structure was also showing signs of strength on Tuesday. The spread between WTI’s nearest two December contracts -- a favored trade for hedge funds to express views on the oil market -- rose further into a bullish backwardation, indicating tight supply. The spread between the two nearest months is also backwardated after flirting with a bearish contango structure a few weeks ago, before contract rollover.
As OPEC+ eases output cuts, Iran’s supply remains critical. Its comeback “will occur in an orderly and transparent fashion,” without upsetting the stability that other OPEC+ nations have toiled to achieve, OPEC Secretary-General Mohammad Barkindo said at Monday’s committee meeting. However, Iranian Oil Minister Bijan Namdar Zanganeh told reporters in Tehran that crude output could return rapidly.
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