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Crude oil heals COVID-inflicted wounds; now what lies ahead?

by Başak Ceylan - bceylan@chemorbis.com
  • 16/02/2021 (03:51)
The demand collapse that ensued the COVID-19 pandemic left the global oil markets face-to-face with an unparalleled volatility in 2020. As the pandemic upended all expectations, WTI futures plunged into negative territory for the first time in April 2020.

However, oil recovered from these record lows through H2 2020, thanks to fiscal stimulus and easing lockdown measures.

2021 was also kick-started by further economic stimulus packages and strengthening market optimism.

Crude oil – Brent - WTI

What’s driving the rally in crude oil prices?

On January 5, Saudi Arabia announced a unilateral cut of 1 million barrels/day for February and March, on top of the previously agreed production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+). The rollout of COVID-19 vaccines in January also raised expectations for better demand.

West Texas Intermediate (WTI) crude oil prices averaged $52/barrel and Brent crude futures averaged $55/barrel in January. These levels were higher by around $5/barrel as compared to the December average. The rally in crude oil prices extended into February, with prices ending last week at a 13-month high.

Despite a rebound in COVID-19 infections amid new variants and fresh lockdowns in several countries, crude oil prices in February have so far remained elevated. Along with the impending $1.9 trillion COVID-19 relief package in the US, extremely cold weather and a substantial production loss in the Gulf Coast also boosted energy prices. Oil and gas workers in Norway also went on strike, which contributed to tighter supplies.

The heightened geopolitical risks were among the bullish factors affecting the prices during the week starting February 15. Tensions rose in the Middle East after Saudi Arabia announced that it intercepted an explosive-laden drone in Yemen, raising concerns on the disruption of supplies.

Will crude oil sustain rally?

Stars may have aligned for a further rally in oil prices, several market players said, citing the prospects of tighter supply as well as optimism rising on vaccination hopes.

OPEC said in its latest monthly report that hedge funds and other investors appeared positive about the oil price outlook, raising their net long positions. The US Energy Information Administration (EIA) also forecast Brent crude oil prices would average $56/barrel in the first quarter of 2021.
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