West Texas Intermediate crude oil hit $70 a barrel for the first time in two and a half years, as traders balanced the reopening of the global economy and OPEC’s recent decision to increase production.
WTI futures for July delivery gained as much as 38 cents, or 0.5%, in early trading on Monday before pulling back on weak Chinese demand. It was the first time since October 2018 that the U.S. benchmark touched $70.
"Crude oil prices to rise as we see a recovery in the world economy and improving demand while at the same time OPEC+ has been very good at restraining production which has resulted in world inventories declining," said Andrew Lipow, president of the Houston-based oil consulting firm Lipow Associates.
WTI prices jumped 5% last week as OPEC and its allies agreed to move forward with plans to increase production. The so-called OPEC+ group will raise output by 350,000 barrels per day in June and 400,000 barrels per day in July.
"There’s a perception in the market that control is with OPEC," said Mike Muller, head of Asia at Geneva-based commodity trader Vitol, at a virtual event held by consultancy Gulf Intelligence, according to Bloomberg. "It will take a long time for U.S. oil to come back" to pre-pandemic levels.
U.S. producers are operating half of the rigs that were being used before the pandemic.
That is a result of rigs being taken offline when prices plunged during the early days of the pandemic, causing a lot of workers to leave the industry.
In addition, the industry remains wary to commit to bringing rigs back online after being burned in early 2020 when oil prices in the low $60s were met with high production costs, resulting in a limited return on investment.
Lipow expects a "continued recovery in oil demand worldwide," but cautions an Iran deal could limit potential price gains.
"The market expects that the U.S. and Iran will ultimately agree to an easing of sanctions that will allow the return of Iranian oil to the market."