Oil prices have been rising day after day, almost constantly breaking new levels since the beginning of February. This is no coincidence, as the beginning of the month marked the start of Saudi Arabia’s extra oil output curtailments.
One would naturally wonder: Isn’t that already priced in? Saudi cuts are old news now.
Even though the Saudi move was known and anticipated since early January, such a development always adds gravity when it is visible in real market flows.
The lag in Saudi shipments is getting noticed in the market and the supply side of the equation is moving prices. The question is for how long.
For now, the staggering ascent in oil prices is alive and well, thanks to both OPEC+ supply restraint and demand recovery optimism.
As major voices around the world, such as the US Fed and Chinese refiners, are pointing towards an economic and oil demand recovery, the rise in oil prices is a natural and well-warranted market reaction.
A weaker dollar is also never a bad news for oil and usually provides a boost as non-US buyers benefit from currency gains and can spend more on purchases.
When it comes to market sentiment, with Brent prices breaking through to $61 per barrel and a twin rise in WTI to $58 per barrel, there is an undeniable supercharged positive energy in oil markets.
The bullish sentiment and the limited oil production are forcing oil out of storage, especially in the offshore sector, which globally has seen a 5% w/w drop.
If the oil price rally continues to have legs, expect to see more inventories being cleared out, especially from ships that can instead be used to bring this now much more valuable oil to market.
As jolly as the mood currently is, the extra Saudi cuts only last for another 50 days, and the current bullish backwardation of the Brent curve indicates that the market has already priced in OPEC+ doing the right thing and staying disciplined with supply management. Which is a risk.
At its February meeting, OPEC+ reassured the market that it would continue its effort to rebalance the market, but only on 4 March 2021 will a concrete policy be communicated.
There is a risk that the oil-producing bloc may bring too much supply back too soon, as OPEC has a much more optimistic oil demand outlook than Rystad.
Rystad Energy estimates oil demand to average 94.9 million bpd this year, whereas OPEC is more optimistic with a 95.9 million bpd forecast.
Talking about risks, the obvious supply risk is US shale, where high oil prices will cause producers to jump with glee until they reach the height of the price ceiling, which OPEC+ will ultimately be the decider of.
Given the readily available volumes of shale ready to be switched on, we do not see oil prices going parabolic anytime soon.
The continuous rise in oil prices feels like a bubble inflating daily. We don’t expect a ground-breaking correction, but the bubble has to break at some point, it’s just market physics.
