2021 has brought in enough optimism for the oil market as prices of both Brent as well as WTI has gained by around 20 per cent. MCX oil futures have gained by around 21 percent so far this year. Oil is considered to be the benchmark indicator of growth in the global economy and the price rise clearly reflects this trend.
The efforts of the OPEC+ alliance has brought in good results and the act of cohesion by major oil producers in the months ahead is something that the world will have a keen eye for. What changed for oil markets in less than two months is the question that needs an answer.
Greater compliance by OPEC +
On 12th April 2020, the OPEC+ alliance agreed for 10 million barrel cut till June 2020, followed by 7.6 million a day until the end of the year, and then to 5.6 million through 2021 until April 2022. Accordingly, the review committee of OPEC which met in the first week of February 2021 said that the report card was very good and the aggregate compliance of the producers since it came into effect in May 2020 was at an unprecedented 99 per cent, i.e. too good for compliance.
Moreover, top exporter Saudi Arabia is curbing supply in February and March, on top of cuts by fellow producers in the Organization of the Petroleum Exporting Countries and their allies, prompting forecasts of a supply deficit this year.
On the other side, US crude inventories have fallen to their lowest since March, before the pandemic crushed the oil markets. Crude inventories fell by 3.5 million barrels in the week to Feb. 5 to about 474.1 million barrels, data from the American Petroleum Institute shows. Crude oil stocks at the Cushing, Oklahoma, delivery point dropped by 1.4 million barrels, in the same time frame. In addition, the US government has lowered its outlook for crude oil production in 2021 to 11.02 million barrels per day from 11.1 million bpd previously forecast.
A lot has changed for oil markets now, when compared to the time when the pandemic gained momentum in March 2020 and the global oil market went into a state of imbalance.
Although oil prices have regained their charm, inventory levels across the globe have been slowly and steadily reducing.
Brent and WTI have risen more than 60 per cent since the start of November due to optimism around coronavirus vaccine distributions as well as production cuts from OPEC+ members. Investors are keeping a watch on a $1.9 trillion COVID-19 aid package for the United States that is expected to be passed as soon as this month. Global oil demand has already recovered to more than 90 million barrels per day vis-à-vis 100 mbpd of oil demand prior to the pandemic and shutdowns.
Will WTI touch $65 barrel soon?
A steady fall in global oil inventories, opening up of the global economy, possible production lift by Saudi Arabia amidst the increasing global demand recovery, and increasing refinery run rates across US and Europe in order to process the crude oil in to products (gasoline & distillates), are possible green shoots of recovery for the global oil demand to stabilise.
WTI oil prices are expected to move higher towards $62/bbl in a month time frame, while MCX oil futures might move higher towards Rs 4,500/bbl in the same time frame.
(The author is AVP (Research), Non Agri Commodities and Currencies, Angel Broking Ltd. Views are his own)