Wed, 02/10/2021 - 21:11
After several false starts over the past few weeks and months, it appears as though the coronavirus crisis is finally coming to an end. Barring the odd rogue strain here and there, the response to widespread vaccination has been overwhelmingly positive; even the most beaten-down sectors are beginning to come back to life. Energy was one commodity hit extremely hard by the pandemic as demand for oil dropped off a cliff with the ensuing global shutdown. At its lowest ebb back in April, Brent actually fell to an 18-year low of less than $20 a barrel!
Naturally, this black swan event's impact was always going to be temporary and, once lockdowns were relaxed and OPEC production cut agreements finalised, we saw a rather quick recovery to $40. But, from then on, oil traded sideways for the best part of the rest of the year. Only after vaccines were approved did the tide really start to turn. With an overwhelming majority of the world's population still unvaccinated, the potential upside is still significant. In fact, Brent is only trading at around $60 a barrel, which is a good 40% from its local high of $86.04.
Demand forecasts looking up
Following an early hiccup due to underestimating the challenge of global vaccination, demand for oil is now growing steadily. The IEA has estimated a rise in demand to 96.64 million bpd this year, representing a 5.5 million bpd recovery YOY. Meanwhile, OPEC was even more optimistic in its own projections, revising its initial 95.89 million bpd estimate to 95.91 million, a 5.9 million bpd improvement from 2020 levels. As long as the cartel can stick to its production cut agreement, there's every reason that this should translate into higher prices for the energy resource — not least following Saudi Arabia's surprise decision to reduce its Feb-March crude production by a further 1 million bpd. Last month, Goldman Sachs predicted Brent at $65 by mid-2021, but it may amend its estimate upwards amid recent developments.
The API's take
The American Petroleum Institute (API) reported a 4.261-million-barrel draw in crude oil inventories in its report of 2 February 2021. While this was actually lower than the previous week's figure of -5.272M, it signifies the return to a positive pattern of consistent draws on reserves. This comes after a shock +2.562M surplus raised concerns in the third week of January. As long as this trend continues, the oil bulls will remain relatively upbeat about future prices. As such, US inventory figures will remain a closely watched metric over the coming weeks as many look with cautious optimism for confirmation of a recovery in oil demand.
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Even with all the fancy models, projections and analyses in the world, nobody truly knows where the market is headed. It would certainly seem that oil has finally put the worst behind it, but even the most spectacular of rallies can see short-term corrections to the downside. But if you think you have a good idea where prices are going, why not put your theory to the test?
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