Flirting at 1-year high, oil eyes $70

A confluence of vaccine optimism, US stimulus, prospects of a weaker dollar, stern Opec+ discipline and President Joe Biden’s bullish energy actions is “roaring the front-end of the oil curve forward,” with Brent now flirting at one-year highs of $58 per barrel, with analysts predicting it breaching $70/b by year end.

On Thursday, oil extended gains after the Opec+ alliance of producers stuck to its reduced output policy and US crude stocks fell, with optimism over a new US pandemic relief bill adding further price support.

Brent crude futures gained 24 cents, or 0.41 per cent, to $58.70 a barrel by 1346 GMT, having earlier hit their highest level since Feb. 21 last year at $59.04.

US West Texas Intermediate (WTI) crude futures climbed 32 cents, or 0.57 per cent, to $56.01 after reaching its highest settlement level in a year on Wednesday at $55.69.

Also supporting prices, US crude oil stockpiles fell by 994,000 barrels last week to 475.7 million barrels, the Energy Information Administration said on Wednesday, their lowest since March. Refiner utilization rates, meanwhile, rose by 0.6 percentage points. "Refineries are back in business, which is supportive for crude," said Phil Flynn, senior analyst at Price Futures.

Ehsan Khoman, director, MUFG Bank, DIFC Branch, said oil’s steady rebalancing since peak inventories in Q2 2020 has continued unabated throughout winter. “Since the start of 2021, demand indicators have picked up, signalling year-end softness was largely seasonal, rather than entirely driven by tighter mobility restrictions. This, in conjunction with the unexpected boost from colder than expected weather in Asia, is a strong signal that the market will remain in a deficit --demand above supply,” said Khoman.

He said the sheer velocity of the leg up in oil prices since the turn of the year compels analysts to not rule out Brent and WTI breaching $70/b and $65/b, respectively by year-end, as markets continue to carve out new contours of normality towards a post-virus equilibrium.

PVM Oil Associates analyst Tamas Varga said supporting factors like high compliance with Opec+ production cuts and its declared target to accelerate stock depletion outweigh negative developments at the moment.

"The extra one million barrel per day Saudi cuts that started this month imply further stock draws until at least the end of the first quarter," Varga added.

“With vaccine rollouts now gathering pace across developed markets during what is likely the last widespread lockdown without a vaccine-resistant variant, we see a clear path to continued rebalancing once we move past the Q1 winter speed bump,” said Khoman.

This, the MUFG Bank analyst said “strengthens the positive carry via backwardation – a bullish structure where nearer-dated contracts trade at a premium to later-dated one and thus signalling supply tightness – which allows investors to own oil (and broader commodities) as a hedge against financial market uncertainty and be rewarded for doing so.”

On Wednesday, Opec and allies extended its oil supply pact at existing levels, suggesting that producers are happy the cuts are draining inventories while uncertainty remains over the outlook for a recovery in demand as the Covid-19 pandemic lingers.

Opec expects output cuts to keep the market in deficit throughout 2021, even though the group reduced its demand forecast.

The market was further bolstered by news that Democrats in the US Congress took the first steps toward advancing President Biden's proposed $1.9 trillion coronavirus aid plan. — issacjohn@khaleejtimes.com