Crude Oil – the bright spot for global economy

Mr. Prathamesh Mallya, AVP- Research, Non-Agri Commodities and Currencies, Angel Broking Ltd

Since 2^nd November lows of lows of $36/bbl for WTI and $38/bbl for Brent oil prices have come a long way with a rise of more than 27% and 29% respectively (as on 14^th Dec 2020).

The optimism in oil markets is a combination of actions taken by the OPEC nations to balance the supply while the optimism over vaccines in different parts of the world is creating a stage for bright spot in the global economy.

US kick-starts the vaccination campaign

US has kick-started the vaccine campaign and are expected to have about 40 million vaccine doses – enough for 20 million people – distributed by the end of December and more than 100 million people, or about 30% of the U.S. population, could be immunized by the end of March.

Although, US have started with the vaccine rollout, major European countries continued in lockdown mode to curb the spread of COVID-19, which has reduced fuel demand. Germany, the fourth-largest economy in the world, plans to impose a stricter lockdown from Wednesday to battle the virus.

Italy said it was considering more stringent restrictions over the Christmas holidays, while most stores in Germany have been ordered to shut until Jan. 10, with little prospect of an easing early in the new year. While there are contrasting set of events in US and Europe, OPEC pared its forecast for the oil demand recovery in 202l by 350,000 barrels per day, due to the persistent impact of the coronavirus pandemic.

Supply side seems to be a worrying factor for oil markets

U.S. energy firms this week added the most oil and natural gas rigs in a week since January as producers keep returning to the wellpad with crude prices trading around $45 a barrel since late November.

The oil and gas rig count, an early indicator of future output, rose 15 to 338 in the week to Dec. 11. U.S. oil rigs rose 12 to 258 this week, while gas rigs rose the most in a week since April 2019, gaining four to 79, according to Baker Hughes data. Both oil and gas rigs hit their highest count since May. U.S. crude oil production has recovered from the two-and-a-half-year lows touched in May, but is still expected to decline by 910,000 barrels per day (bpd) this year to 11.34 million bpd.

On the other side, Libyan oil production stood at 1.28 million barrels per day as on 14^th Dec 2020, up from 1.25 million bpd in late November.

OPEC cuts oil demand forecast for 2021

OPEC nations have forecasted that the global oil demand will rise by 5.90 million barrels per day (bpd) next year to 95.89 million bpd. The growth forecast is 350,000 bpd less than expected a month ago. The group forecast demand for its crude will be 200,000 bpd lower than expected next year at 27.2 million bpd.

Oil has recovered from historic lows reached in April when the pandemic hammered demand, helped by a record supply-cut deal by the Organization of the Petroleum Exporting Countries and allies, known as OPEC+.OPEC+ will further ease its supply restrictions in January by adding an extra 500,000 barrels per day although the easing is more gradual than previously agreed, to provide additional support to the market.

What next?

Oil price rise from hereon will be a combination of vaccination rollout across the globe along with hopes of increase in fuel demand on a global scale. The efforts by the OPEC to balance the oil market has yielded good results with increasing oil prices since the March lows, the optimism has to continue in 2021 also and the number of COVID-19 infections also has to slow down further if oil prices has to maintain the growth momentum going.

From a month perspective, WTI oil prices (CMP: $47) might move higher towards $52/bbl while MCX oil futures (CMP: Rs.3452/bbl) might move higher towards Rs.3900/bbl.