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Oil Follows One of Two Generally Positive Scenarios

By Sergey LysakovMarket OverviewJan 13, 2021 14:15
Oil Follows One of Two Generally Positive Scenarios
By Sergey Lysakov   |  Jan 13, 2021 14:15
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Oil prices exceeded $57 per barrel (bbl) for the North-Sea Brent benchmark adding 1.5% more in course of Asian trading hours on Wednesday to the already remarkable ten-week rally. This happened just after inventory stocks in the United States dropped by 5.8 million barrels to around 484.5 million barrels altogether, according to statistics for the week ending January 8 that were released by the American Petroleum Institute (API) late in the evening on the previous day. The latest official reports by the U.S. Government Energy Information Administration (EIA) has also estimated a drop of more than 14 million barrels in major crude oil inventories since December 18, and a fresh portion of EIA's data is expected to be released today at 15:30 GMT.

If today's data from the EIA confirms the overall trend, oil prices have a chance to go even beyond the present achievements. By European midday, the quotes already rolled back to the levels around $56.5 on some profit-taking. It makes sense at least to take into consideration that even here the price is still about $5/bbl higher than it was on Christmas Eve, and it has gained almost $20/bbl since the beginning of November. So, the current levels partially reflect advanced funding of the hydrocarbon sector to feed the market rally as vaccine rollout is just beginning and seems to be at a slow pace, while the current lockdowns in Europe could prevent a better pace of economic growth over the next two to three months. It is just unlikely that the vaccine could have a meaningful effect on oil demand until the third quarter of this year.

At the same time, a confident move of oil prices to a higher range well above $50/bbl looks to have a good fundamental cause. The manufacturing activity in the Euro area for December came out at the level of 55.2 points in early January, which is just insignificantly lower than 55.5 points a month before, and both values are near multi-month highs. In Germany, which is a flagship economy for Europe, the same indicator is now at 58.6 points, it is still high at 57.3 points in the United Kingdom, and even in Italy it rose to 52.8 points vs 51.5 points a month earlier. In the United States, the Institute for Supply Management (ISM) calculated its manufacturing activity index, and it came out at 60.7 points, which is the highest level since September 2018, and 3.2 points higher than in early December. The expected relatively high $2,000 stimulus payments for U.S. citizens soon may also support the demand for motor fuel. Plus, the industrial potential in China and India continues to recover at priority rates.

As for the latest decision made by the Organisation of the Petroleum Exporting Countries (OPEC) and its other exporting allies in January, it looked quite adequate and very thoughtful in the eyes of market consensus. The so-called OPEC+ ministerial meeting decision was to add only 0.5 million barrels per day (bpd) each month preliminary, and the exporting countries agreed to check the situation and revise their plans again every month. It is reassuring to know that the markets with no production growth will be able to keep up with demand. This kind of oil cartel's behaviour demonstrates its current expectations that global fuel demand will probably continue to develop in one of two basic scenarios, and that both of the scenarios may carry different degrees of positivity.

A less likely, but clearly considered by exporters scenario, is the addition of perhaps another production volume, but only if the world economy suddenly begins to recover at a faster pace in the first half of the year. However, this is just a reserved option in their pocket. In the meantime, the main bet of the OPEC+ countries is clearly made on the also quite decent option, in which the demand for fuel will not decline and continue to grow until spring, albeit at the same slow pace as now.

On the other side, the National Iranian Oil Co. on Jan. 11 signed eight more oil projects as part of its long-term plan to boost output by 355,000 bpd at 33 fields, which started in 2019. Those projects worth $1.2 billion are potentially increasing oil production by 95,000 bpd. The first group of all Iranian oil production enhancement projects are about 30% completed, and some of the fields have started production, NIOC managing director Masoud Karbasian said at the ceremony. Iran pumped 2.04 million bpd in December, according to the latest S&P Global (NYSE:SPGI) Platts survey of OPEC production. That is not a big change from an average of 2.03 million bpd in 2020 but it is down from 2.4 million bpd in 2019 and about 3.83 million bpd in mid-2018 because of the U.S. sanction measures.

Other good news for the oil market is Saudi Arabia’s surprise announcement that it is ready for an unilateral cut of as much as 1 million barrels per day (bpd), which is beyond its share of OPEC+ cuts in February and March. This has made refiners in Asia compete to secure supplies from Europe, with record purchases of North Sea cargoes. According to Reuters, seven crude oil cargoes from the North Sea were bought and sold during a trading window last Thursday, and this, according to an oil trading source, was a daily record for North Sea cargoes traded in one day in recent history. Typically, one or two cargoes of 600,000 barrels of crude each are being traded on a normal day in normal circumstances, Reuters wrote.

But after the effect of this surprise will fly away, then oil prices are highly likely to stop the explosive growth, but they could confidently and permanently settle in a three-month or even six-month range that may extend from about $50 to $60 per barrel, but most of the time it may stay around the moderate area of $53-55. So, it makes sense to take into account this relatively realistic outlook when building further trading plans in the oil market.

Oil Follows One of Two Generally Positive Scenarios

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Oil Follows One of Two Generally Positive Scenarios

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