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Can oil prices keep rising in 2021?

Saudi illo
Saudi illo

The new year may already have more in common with 2020 than many would wish, but the negative oil prices that rocked the market when demand crashed in April look set to remain in the past. 

Brent crude prices rose above $55 last week for the first time since February, while US oil (West Texas Intermediate) – which had slumped below zero – topped $50. 

The rally was driven by Saudi Arabia’s plans to voluntarily cut production by 1m barrels per day in February and March – a surprise decision attributed directly to the kingdom’s Crown Prince Mohammed bin Salman. 

Along with the rest of the Opec+ coalition’s agreement to keep production almost flat, it will help suppress supply in the face of continued coronavirus lockdowns and a very uncertain return to demand. 

Lockdowns for billions of people during 2020 sent global oil demand down by about 9m barrels a day to 90.3m barrels, wiping out about eight years of growth. 

Buoyed by Saudi’s decision and expectations of a more balanced market this year, Standard Chartered analysts have raised their Brent forecast to $51 per barrel, while UBS analysts think it could hit $60 by the middle of the year. 

Analysts at Goldman Sachs reckon prices could even hit $65, with a deficit predicted in April to July as vaccinations increase and the warmer weather slows the pace of infections, leading the way to more normal life once more. 

There is plenty that remains uncertain, however. On the supply side, countries may be tempted to dodge their obligations under the Opec+ agreement, particularly amid rising prices. 

Agreement in the Opec+ coalition is fragile at the best of times and will need careful management as the cartel takes the lid off the production cuts from April. Nor is it clear how the rest of the market will respond. 

“We are going to have to keep an eye on this month to month,” says Ann-Louise Hittle at consultancy Wood Mackenzie. “The real key is the pressure on Opec+ and the fact they are trying to drive towards a situation where they can increase production. I think that will start to take some of the steam out of prices.

“We also don’t know to what degree other nations [outside Opec +] will increase production, particularly with prices going up, and that could undermine what Opec is trying to achieve.” 

Monday already brought a break to last week’s optimism. Amid a strengthening dollar and fears over the pandemic, Brent fell 1.7pc to $55.28 by mid-afternoon, while US oil fell 1.6pc to $51.76. 

Bjornar Tonhuagen at Rystad Energy says some correction was to be expected, but concern over Chinese demand is growing amid a new spike in Covid cases, while traders fear renewed lockdowns. “China has been the recovery leader and oil demand owed a big part of its comeback to the country,” he says.

Global road traffic remains almost a fifth lower than 2019 levels, Tonhuagen adds: “There is clearly a second dip in road fuels demand which is much steeper than market participants saw coming some weeks ago.”

Meanwhile, attention is particularly focused on how US producers who are not in Opec+ will respond to the production cuts. 

The success of shale drillers in the Permian Basin and elsewhere in America over the past decade has upturned global markets, turning the US into the world’s largest oil producer in a major challenge to Saudi Arabia. 

But US shale producers ran into trouble before the pandemic, punished by debts as well as falling oil prices, and were then crushed by April’s oil price collapse.

The Saudis ramped up output in March in a bid to squash their US rivals, but will those production cuts now have the opposite effect? 

Linda Htein, also at Wood Mackenzie, is cautious: “There is certainly a lot of optimism around the vaccine, but there is still a lot of downward pressure and risk. Are they [shale producers] willing to take a risky bet and increase budgets based on these price signals? I would say, probably not. 

“They are going to want to see more price stability for a longer period of time, and a sense that fundamentals are driving prices. They will benefit from the price increase, however, so they may be better positioned in years to come to grow production.”

Others are more confident in a stronger recovery. Rystad Energy notes that US oil rigs rose in the seven days to January 1 for the sixth consecutive week, while producers have been working hard to slash costs. 

“Though US producers will have a hard time returning to the 2019 peak of 13 million bpd, the current odds favor a stronger-than-expected shale recovery in 2021,” Rystad believes. 

Saudi Arabia’s crown prince may yet regret his new year gift to the market. 

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