Crude rallies on US, EU demand hopes; rising supply outlooks eyed

New York — Crude futures settled higher May 21 as strong US and European economic data underscored near-term demand bullishness, though prices were still down for the week amid concerns of rising global supply.

NYMEX July WTI settled $1.64 higher at $63.58/b, and ICE July Brent was up $1.33 at $66.44/b.

An overnight price rally accelerated during US daytime trading as strong PMI readings in the US and the Eurozone pointed to rising near-term energy demand.

The IHS Markit US flash composite PMI for May jumped to a record-high 68.1, data released May 21 showed, up from 63.5 in April. The flash composite PMI for the Eurozone, the bulk of which still facing pandemic lockdowns early in the month, climbed to 56.9 in May, up from 53.8 in April and a 39-month high.

NYMEX June RBOB settled up 2.13 cents at $2.0685/gal, and June ULSD climbed 2.38 cents to $1.9882/gal.

"Crude prices are rebounding after much of the energy market has priced in more Iranian crude output later this summer and after robust PMI data across Europe and the US point to a greater short-term pickup with crude demand," OANDA senior market analyst Edward Moya said in a note. "The crude demand outlook remains very strong for the second half of the year, so it will be hard for oil traders not to buy every dip."

Still, crude futures were down around 3% on the week amid concerns that progress in US-Iran nuclear negotiations could see the return of Iranian barrels to the global market.

Iran's president Hassan Rouhani said on state television May 20 the "main agreement" had been made, with only final issues remaining to be discussed.

A return of the two sides to compliance with the JCPOA would potentially return up to 2.5 million b/d of Iranian crude to the market this year. But while this extra supply is likely to add headwinds to prices, it is unlikely to present a serious challenge to the market, analysts said.

"While any announcement confirming the lifting of sanctions would likely hit sentiment further, we believe that this will be short-lived, given that the supply and demand balance remains supportive," analysts at ING Bank said in a daily note May 21.

The additional Iranian oil shipments would roughly equate to the supply deficit on the oil market envisaged by the International Energy Agency for the fourth quarter, meaning OPEC+ would then not need to further expand its production to preclude any tightening of the market, Commerzbank analyst Carsten Fritsch said in a separate note.

Further undergirding oil prices is a US dollar holding near three-month lows. The ICE US Dollar Index was up slightly on the day but was still holding at below 90 in afternoon trading, down sharply from early April levels of above 93.