Front-month WTI oil futures rallied over 2% to a 13-month high at $60.95.
A flaring up in the Yemeni civil war boosted crude prices, in addition to reflation-trade positioning, which is being aided by the ongoing tumble in world-wide positive Covid test results (now one third the January peak), alongside optimism about vaccination programs and prospects of big stimulus spending in the U.S. and EU.
Taking step back, the question is how much higher can oil prices go in a sustained manner.
Crude markets are now well into pre-pandemic ranges, yet global demand is not likely be restored for a considerable time.
OPEC last week cut its 2021 oil demand projection by about 100 M barrels per day due to more severe than anticipated lockdowns in major economies in the first half of the year.
This forecast still assumes a global economic recovery in the latter half of the year on the back of successful vaccination programs. This puts the focus on supply, leaving aside the impact of a softening dollar, which is only a part of the story and is in any case a partial by-product of the demand for oil and other assets in the global reflation trade.
The OPEC+ group are limiting quotas, which are being reviewed on a monthly basis.
Saudi Arabia unilaterally complemented this regime with an additional two-month output cut, which took effect this month and which has more than offset rising supply out of Libya and Iran.
Without talking numbers, this supply restraint is evidently proving effective given the oil price rise and the recent corresponding draw downs in global crude inventories.
But, U.S. shale oil production, which is viable again after the surge in oil prices, is rising and will have increasing impact — the rig count is already up 70% since the 2020 lows.
This is something the EIA forecasted in its February oil market report.
Then there is there question of continued OPEC discipline.
Saudi Arabia is unlikely to extend its unilateral supply reduction beyond March, as it won’t want to give up market share.
Discipline among the OPEC+ nations will be a factor going forward, and is more likely to weaken than strengthen.
The Saudi-Russian price war last year illustrated how quickly the dam of quota curtailment can burst, although a repetition of that episode seems highly unlikely.
Overall, market sentiment remains strongly bullish.
JPM in a recent note forecast an “epic systemic short squeeze” will unfold over the next month, and a GS note mooted $150.0 as an upside target.
Analysts are less optimistic, being skeptical of the bullish supply gap hypothesis.
The oil industrial is well positioned, in terms of known and unexploited reserves, to respond to any sustained demand increases, while demand-quelling factors, such as the new trend for working from home, and alternative electrical powered transport is increasingly available.
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