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Return Of Oil’s Bullish Run

The official word is out. Oil markets have pressed the accelerator on the bullish ride and have now attained pre-pandemic levels. Turning back to the conundrum of 2020 and the bearish ride of oil, the idea of a return to some normalcy seemed inconceivable as the pandemic took the world by storm. Crude oil had dived into the abyss by slumping to a low of $6.54 per barrel with no signs of a recovery in the near horizon. Months into the Covid 19 situation when the death toll continued to surge, oil’s bearish run reversed in November 2020 and the monthly bullish run has sustained ever since. The light at the end of the tunnel was sparked by the news of vaccines in various countries and oil seems to be on the road to recovery.

Driving Factors

Crude oil prices had begun 2021 at $48.40 per barrel. Having jumped by 30% in less than two months, the price has now soared to its highest at $62.94 per barrel on February 22, the highest since January 2020. During January 2021, the value of crude oil gained 18% and kicked off the New Year with immense momentum. The analysis was partly based on the EIA’s Weekly Petroleum Status Report that showed decreasing inventories. Apart from one inventory report on January 22 that showed an incline, all reports since the beginning of the year have registered a decline in inventories of staggering magnitudes. Oil traders and analysts have kept a close watch on these inventory reports due to the impending market dynamics and the buzz it creates.
Another attributing factor to the bullish ride of oil is the strong commitment from OPEC members and its allies to keep production levels low to nullify the slump in demand. Saudi Arabia, a powerhouse in the oil markets, led the charge with an announcement that it would cut its production by one million barrels per day. This slash was initiated to offset Russia’s and Kazakhstan’s endeavour to increase production levels.

One of the most important factors for the oil markets is the expectations for an economic rebound in 2021. The global economy which had staggered towards the finishing line in 2020 was bound for rejuvenation given the usage of vaccines against the corona virus is well underway. The oil markets reflect the sentiments of traders, and the rampant bullish market direction is a clear indication of an economic revival.

Way Ahead

A strong recovery in the demand for oil from the pandemic has pushed the value to close at its highest since January 2020. Goldman has predicted that the rally will accelerate as consumption outpaces supply from the OPEC+ economies and the shale industry. In another development, according to Vortexa, crude oil stored at sea declined to an 11-month low in another mark of dwindling inventories. According to Morgan Stanley, the market is well on the way towards what could be the tightest quarter since the turn of the century. Socar Trading SA has forecasted that the Brent Crude prices, a global benchmark for oil prices around the world, could touch $80 per barrel by the end of this year due to the simple logic that the excess supply built during the global crisis will be drained by summer. As per Trafigura Group, the loss of oil output after the huge freeze in the US will also assist the market as economies emerge from their respective lockdowns. Fuel flows from the Asian nations to the west have gained momentum after the winter months left some of the refineries battling a slow start to 2021.

The two kingpins of the oil markets, Saudi Arabia and Russia, will be locking horns at the OPEC+ meeting with contrasting opinions on whether to inject more supply to the markets in April. While Saudi Arabia wants to hold the output steady, Russia has signaled that it still wants to proceed with an increase. This developing story looms as a major driving factor for the oil markets. Meanwhile, Iran and the US have been debating over how to revive a nuclear deal. This deal reflects the challenges ahead for President Biden although nuclear inspectors have convinced Iran to allow some wider monitoring for a temporary period.

The bullish perspective for oil has not discounted the possibility of new strains of virus forcing economies back into shutdown. If this side of the story does come out to be true then the crude oil forecast could inevitably weaken although it would be impossible to factor in the ramifications without further information. While any signs of a complete recovery could be months and years away, oil buyers are forecasting optimism today in no uncertain terms and those signs could mark the beginning of a new chapter in the global economy.

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]

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