COVID vaccine optimism and production cuts from oil producers have caused oil prices to float back to their level before the pandemic after turning negative for ten months.
At one point this month, West Texas Intermediate hit US$60 a barrel, up 60 per cent from October and the highest level since January 2020, before the novel coronavirus spread across the globe and hammered economies.
Prices disturbed again last week, as Texas was struck by a winter storm that for days left millions without electricity, shutting down refineries and pipelines. Prices slipped below US$60 a barrel on Friday on speculation that demand for refineries would be low. They went back to about US$60 on Monday as U.S. crude oil production started kicking back into gear.
The WTI benchmark dropped as low as minus US$37.63 a barrel on April 20 due to market technicalities, fears that the pandemic and other factors will decimate global oil demand.
Oil agencies expect that it will take longer for the market for physical oil to rebound. In January, the International Energy Agency reduced its demand projections by 280,000 barrels a day in 2021 to 5.5 million, pointing out that spiralling infection rates in some countries had triggered a return to lockdowns and that this would disrupt the anticipated demand rebound.
Investors and hedge funds are jumping in, and it will allow economies to swing up by betting on the vaccination drives that are gearing up around the world. They claim that travellers can reacquaint themselves with road trips and jetliners, bullish factors for oil prices, as restrictions begin to ease.
Increased stock prices—the Dow is approaching record highs—are also promoting hope that economic growth will gain traction and raise oil prices further.
An oil market expert said, “More and more investors are increasing their long positions,”
The super-easy monetary policies of the world are also playing a part. The U.S. Federal Reserve has been delivering vast quantities of cash to the markets, much of which makes its way into oil and other commodities.
And governments continue to spend wildly. U.S. U.S. President Joe Biden is proposing a $1.9 trillion stimulus package, and both chambers of Congress are dominated by his Democratic Party, which could smooth the way.
The production cuts of oil producers are also maintaining the current price levels. Since January, OPEC+, a much larger group of oil-exporting countries than the initial group, has cut oil production by 7.2 million barrels per day, around 7% of world demand. And the enforcement rate among the members of the sometimes bickering cartel is close to 100%.
Saudi Arabia, the de facto leader of OPEC, has agreed in a surprising step to unilaterally slash output by 1 million barrels a day, around 10 per cent of its production, this month and next. This is on top of what is being achieved by OPEC+. The decision stems from a lesson learned by Saudi Arabia from the negative prices of last year: to know when to avoid chasing market share.
Maintaining oil prices is more critical for Saudi Arabia than ever, now that Saudi Aramco, owned by the state, is publicly traded on its domestic stock exchange. ‘Saudi Aramco’s worth comes down to its oil reserves multiplied by oil prices,’ said an industry analyst. “It’s important for Saudi Arabia to raise oil prices to improve the company’s value.”
Shale oil manufacturers seem to have learned the same lesson in the U.S. They were cautious about increasing demand. For years, many of these businesses have failed, making banks and equity funds unwilling to finance them. “We continue to expect that higher prices are needed for a rebound in shale activity,” Goldman Sachs said in a note.
With the Biden administration indicating that new fracking operations would be limited, “shale oil production is unlikely to significantly grow unless the administration’s attitude changes,” noted Tatsufumi Okoshi, a senior economist Nomura Securities. He thinks that oil prices will stay in the high $60s. Many other economists suggest that oil prices will increase to around $70 or even $80.
Some practitioners point out downside risks.
Variables that might throw the oil market off-kilter are Iran and the nuclear agreement that the U.S. pulled out of under former President Donald Trump. Iran will likely restart oil exports—up to 2 million barrels a day—with Biden trying to restore the nuclear agreement.
OPEC+ questions — primarily, how long will its production cuts last? —to linger. Members will meet in early March to discuss current levels of output.
Russian Deputy Prime Minister Alexander Novak told a local T.V. station earlier this month that this year’s oil prices could average $45 to $60 a barrel.
“This remark hints that Russia doesn’t want further output cuts,” said Takashi Hayashida, chief executive of Elements Capital’s commodity trading house. “If confrontation between Saudi Arabia and Russia deepens, oil prices will not be able to maintain their current high level.”