Crude oil has been on an amazing run since the initial lockdowns back in March 2020, much like all other risk assets. After dropping into the negative in April, WTI oil is now only a couple of dollars shy of the 2020 and pre-lockdown high of $65.60ish and Brent is also very close to its corresponding high at $71.20ish. Prices have risen mainly because of the record production cuts from the OPEC and on-OPEC allies, such as Russian and Kazakhstan, collectively known as the OPEC+. Demand has also recovered as countries have slowly re-opened. Optimism surrounding the vaccine rollout programmes have helped to accelerate the rally in recent weeks as investors look forward to more normal times ahead. But this also means that the OPEC+ will be keen to ease production curbs, especially as prices have risen so sharply. Where will oil prices head to next?
For now, crude oil continues to remain supported as investors look forward to the March 4 OPEC+ meeting, when the group must decide whether to provide more crude oil to the market from April and onwards.
In December, the OPEC + restored 500K barrels a day as part of the gradual process. The new national lockdowns meant the easing of productions curbs were paused in January. Just over 7 million barrels of oil per day remains withheld which will need to be pushed back into the market in the coming months.
With oil prices having recovered nicely and lockdowns likely to ease in the coming weeks and months, the OPEC+ will likely agree to the gradual easing of output. They obviously don’t want to scare the market, but equally wouldn’t want to lose market share to US shale producers. So, I doubt oil prices will sell-off sharply, unless the cuts happen to be much larger than expected, or the group signals quicker rollback of cuts in the near future.
Talks are likely to be tense, especially with Saudi Arabia already providing additional cuts to drive prices even higher while Russia is keen to retain its market share. I think Saudi will try to encourage everyone to increase production minimally. But if that strategy fails, this time it is very unlikely that Saudi would be willing to provide further voluntary cuts.
In terms of demand, I think this will rise sharply as the global economies re-open and travel re-starts. But the rising levels of demand for oil will be offset as OPEC supply is likely to rise proportionally. So, the net impact of this will be neutral on prices. It is important to remember that oil prices have been going up in anticipation of a sharp global recovery. Thus, the rally is likely to slow or even reverse soon as the higher prices attract fresh non-OPEC supplies to hit the market.
As things stand though, I think both Brent and WTI will hit their pre-lockdown highs first, before we potentially see a sizeable correction. In any case, I think the upside for oil looks limited from here.
Source: ThinkMarkets and TradingView.com
Source: ThinkMarkets and TradingView.com