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TOKYO – Ten months after turning negative for the first time in history, oil prices are floating to their pre-COVID level, driven by vaccine optimism and production cuts by oil producers.
West Texas Intermediate hit $ 60 a barrel at some point this month, up 60% from October and the highest level since January 2020, before the novel coronavirus hit the world and hit the globe. hammers savings.
On April 20, the WTI benchmark fell as low as minus $ 37.63 a barrel due to technical details of the market, expectations that the pandemic would decimate global oil demand, and other reasons.
Oil agencies predict that the recovery in demand for physical oil will take longer. The International Energy Agency in January cut its 2021 demand forecast from 280,000 barrels per day to 5.5 million, noting that soaring infection rates had triggered a return to lockdowns in some countries and that this would delay the expected rebound in demand.
Still, investors and hedge funds are stepping in, betting that the vaccination campaigns brewing around the world will encourage economies to recover. They believe that, as restrictions begin to ease, travelers will become more familiar with car travel and airliners, which are pushing up oil prices.
Rising stock prices – the Dow Jones hitting record highs – is also fueling optimism that economic activity will gain momentum and further boost oil prices.
“More and more investors are increasing their long positions,” said an oil market expert.
The world’s super-easy monetary policies also play a role. The US Federal Reserve has provided markets with enormous amounts of liquidity, much of which ends up in oil and other commodities.
And governments are still spending a lot. US President Joe Biden is proposing a $ 1.9 trillion stimulus package and his Democratic Party controls both houses of Congress, which could make it easier.
Reductions in supply from oil producers are also supporting current price levels. OPEC +, a much larger group of oil-exporting countries than the original group, has since January cut oil production by 7.2 million barrels a day, or about 7% of global demand. And the compliance rate among frequently bickering cartel members is close to 100%.
In a surprising move, Saudi Arabia, the de facto leader of OPEC, has decided to unilaterally cut production by one million barrels per day, or about 10% of its production, this month and beyond. . This is in addition to what OPEC + does.
For Saudi Arabia, keeping oil prices high has become more important than gaining market share. © Reuters
The decision stems from a lesson Saudi Arabia learned from negative prices last year: knowing when to stop chasing market share.
For Saudi Arabia, sustaining oil prices is more important than ever, now that state-owned Saudi Aramco is listed on its national stock market. “Saudi Aramco’s value comes down to its oil reserves multiplied by oil prices,” said an industry observer. “It is important for Saudi Arabia to increase oil prices to improve the value of the company.”
In the United States, shale oil producers seem to have learned the same lesson. They were cautious about increasing production. Many of these companies struggled for years, leaving banks and equity funds hesitant to finance them. “We continue to expect higher prices to be necessary for a rebound in shale activity,” Goldman Sachs said in a report.
With the Biden administration hinting that it will limit further fracking activity, “shale oil production is unlikely to increase significantly unless the administration’s attitude changes,” Tatsufumi Okoshi noted. , Senior Economist at Nomura Securities. He thinks oil prices will stay in the $ 60 range. Many other economists believe oil prices could reach around $ 70 or even $ 80.
Other experts point to the downside risks.
Iran and the nuclear deal that the United States under former President Donald Trump withdrew are variables that could destabilize the oil market. As Biden seeks to restore the nuclear deal, it is possible that Iran will resume its oil exports – up to 2 million barrels a day.
Russia has indicated it does not want further production cuts, with Deputy Prime Minister Alexander Novak telling a TV station that oil prices this year could average $ 45 to $ 60 a barrel. © Reuters
Questions about OPEC + – mainly, how long will its production cuts last? – stay. Members will meet in early March, when they will discuss current production levels.
Earlier this month, Russian Deputy Prime Minister Alexander Novak told a local television station that oil prices this year could average $ 45 to $ 60 a barrel.
“This remark suggests that Russia does not want further production cuts,” said Takashi Hayashida, managing director of commodity trading firm Elements Capital. “If the confrontation between Saudi Arabia and Russia deepens, oil prices will not be able to maintain their current high level.”
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