Crude oil at 8-month high, but rising US rigs, increased Libya production & pandemic worries may limit upside

Crude oil prices hit their highest level since March 2020 on hopes that successful COVID vaccines may lead quick global economic recovery and thus increase the demand for oil. Firm refinery demand from China amid OPEC+ record compliance and hopes of further supply cuts also supported prices.

The global benchmark NYMEX crude surged above $46 a barrel last week while its Asian counterpart Brent crude had risen to nearly $50 a barrel. Meanwhile, domestic futures prices at MCX platform gained more than 32 percent from its November first week lows.

Oil prices collapsed into negative territory in April due to factors like high open interest and fundamental factors like shortage of storage options and a sharp decline in demand owing to coronavirus pandemic. However, prices returned gradually on optimism over global economic outlook.

Successful vaccine trials de-risks the path back to normal for global oil market. Recently, three major pharmaceutical companies - AstraZeneca, Pfizer Inc, and Moderna - have announced progress on a vaccine and we can expect it to be rolled out by the year-end. Hopes of successful leadership transition in US after the President-elect Joe Biden received a go-ahead also improved the market sentiment.

Expectations that the OPEC may extend their production cut plan in the coming months attracted more speculator interest in oil. The recent OPEC meeting took place with a widespread support for a three month extension of the current level of oil production cuts. However, OPEC+ group - the Organization of the Petroleum Exporting Countries, Russia and others - will have a full meeting on Nov. 30 and Dec. 1 to decide the output policy for the next year.

The OPEC+ group complied 101 percent with the oil production cuts in October, keeping a high level of conformity ahead of the crucial meetings by the end of this month. In September, the overall compliance of the OPEC+ pact participants was at 102 percent, the highest since May 2020.

Increased refinery activity from China also aided the market sentiment. China's October refinery output hit record high, China's crude oil throughput rose 2.6 percent in October from a year earlier to its highest-ever level as fuel demand firmed on strong holiday travel. The country processed 59.82 million tonnes of crude oil in October, equivalent to 14.09 million barrels per day (bpd), according to data from the National Bureau of Statistics (NBS).

Crude oil inventories from the US has been declining since June. Recent data shows that the money managers increased both long and shorts in US crude futures and options positions as well.

Amid weakening global fuel demand because of the second wave of pandemic, OPEC+ group may consider delaying increasing output. This may trigger supply squeeze and support prices. There are rumours earlier that the producers group was set to raise output by 2 million barrels per day in January, about 2% of global consumption, as part of a steady easing of record supply cuts implemented this year.

Looking ahead, vaccine hopes and optimism over global economic recovery continue to offer lower level support to prices. However, rising number of rigs employed in the US, increased production from Libya along with worsening pandemic worries are likely to limit major gains in the counter. On the price front, NYMEX rates may vary inside $34-48 a barrel with mild positive bias in the immediate run.

(Hareesh V is the Head of Commodity Research at Geojit Financial Services.)