A barrel is expected to reach 80 dollars … and the recovery of demand will take more time
After 10 months of turning into negative territory for the first time in history, oil prices rose again to pre-Corona levels, driven by optimism about the availability of vaccines and the reduction of oil producers to the volume of their production.
West Texas Intermediate crude reached $ 60 a barrel this month, up 60% from October’s levels.
It is also its highest level since January 2020, that is, before the outbreak of the new Corona epidemic around the world and its impact on economies.
The Japanese magazine “Nikai Asian Review” reported that oil prices were disturbed last week again, after Texas was hit by a winter storm that left millions of Prime Time Zone without electricity for days, and the refineries and pipelines were closed.
On Friday, oil prices fell to a level of less than $ 60 a barrel, amid speculation that the demand for refineries could weaken .. But on Monday, they returned to about $ 60 a barrel with the return of US crude oil production.
The West Texas Intermediate crude oil index fell to its lowest level on April 20, when the price per barrel reached a negative $ 37.63.
This is due to market technologies and expectations that the epidemic will eliminate the global demand for oil, and other reasons as well.
And oil agencies expect that the recovery in oil demand will take more time.
In January, the International Energy Agency lowered its forecast for demand in 2021 by 280,000 barrels per day, to reach 5.5 million barrels, noting that the high cases of Corona epidemic led to the resumption of closures in some countries, which may delay the expected recovery in demand. .
However, investors and hedge funds are betting that the vaccination campaigns that all countries of the world are preparing to eliminate the epidemic will encourage economies to grow again.
They also believe that easing the closure restrictions will send passengers back to land trips and jet planes … and hence the rise in oil prices.
The Japanese magazine pointed out that the rise in stock prices – the “Dow Jones” index rose to record levels – also enhances optimism that economic activities may gain significant momentum and boost oil prices further.
At the same time, super-easy monetary policies in the world play a role as well. The US Federal Reserve is providing the markets with huge sums of cash, much of which finds its way into oil and other commodities.
The governments are also still spending heavily. There is US President Joe Biden who is pushing ahead with a stimulus package worth 1.9 trillion dollars, and his Democratic Party controls both houses of Congress, which may pave the way.
The cuts in the oil supply on the part of the producers have helped to maintain the current price levels.
The Organization of Petroleum Exporting Countries and its allies – the “OPEC Plus” alliance – have reduced oil production since January by 7.2 million barrels per day, or about 7% of global demand, and the compliance rate among the cartel members who quarrel a lot is close to 100%.
In a surprise move, Saudi Arabia, the de facto leader of OPEC, decided to unilaterally reduce its production by one million barrels per day, or about 10% of the volume of production in February and March 2021, in addition to the cuts offered by the OPEC Plus alliance.
This decision comes as a result of the lesson that Saudi Arabia learned from negative oil prices in 2020, as it realized when it should stop pursuing its market share.
As for Saudi Arabia, maintaining oil prices is more important than ever, especially since the shares of Saudi Aramco are now traded on the local stock market, as it seeks to improve the value of the state-owned company.
In the United States, shale oil producers seem to have learned the same lesson. They have been wary of increasing production. Also, many of these companies have suffered for years, which contributed to the reluctance of banks and equity funds to finance them.
Goldman Sachs said in a report, “We still expect that there is a need for a price increase in order to revive shale oil activity.”
Given the Biden administration’s hints that new hydraulic fracturing could be restricted, it is unlikely that shale oil production would grow significantly unless the administration’s position changed, said Nomura Securities’s chief economist, Tatsufumi Okuchi.
Okuchi believes that oil prices will remain at levels of $ 60 a barrel, while many other economists believe that prices will rise to about $ 70 or even $ 80 a barrel.
Other experts point to downside risks. There are variables such as Iran and the nuclear agreement from which the United States withdrew during the era of former President Donald Trump, which in turn may lead to the oil market derailing from its normal course, but Iran can resume oil exports as Biden seeks to restore the nuclear agreement.
There are questions surrounding the OPEC Plus alliance, among them “How long will the production cuts last?”
The cartel members will meet in early March and discuss current production levels.
The article Corona Vaccine and Improved Economic Activity Supporting Recovery in Oil Prices was written in Al Borsa newspaper.