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A worker at an oilfield owned by Bashnef in Bashkortostan, Russia. The optimism around vaccine rollouts has supported oil prices into 2021 – but traders are now focusing on the impact of the pandemic on longer-term demand. Image Credit: Reuters

The optimism around vaccine rollouts has supported oil prices into 2021 – but traders are now focusing on the impact of the pandemic on longer-term demand for the commodity.

Brent crude prices closed at $55.04 a barrel in its last trading session, while US crude dripped slightly to $52.14.

“We might be further away from supply-demand balance ante that current price levels suggest,” said Reed Blakemore, deputy director of the Atlantic Council’s Global Energy Center.

Blakemore added there’s still a long way to go before “we can really start to draw on the inventories in the physical market.” There are “uncertainties abound on the demand side like consumption habits associated with economic reopening, the easing of lockdowns and return of consistent commuter activity”

Vulnerable prices

Until concerns around the demand for physical oil are taken care of, the market will be vulnerable to sentiments created by lockdowns and possible new strains of the COVID-19 virus.

On the supply side, oil prices might get influenced by the “faltering of consensus in OPEC+ or the re-entry of geopolitical forces into the market,” said Blakemore.

Biden effect

“There will clearly be a conscious shift by President Biden from the ‘energy dominance’ approach of his predecessor to an energy strategy focused on accelerating the energy transition at home and re-engaging on climate action abroad,” said Blakemore.

However, Biden is not expected to completely turn his back on the oil and gas industry.

“While President Biden has surely thrown down a gauntlet of climate ambitions at home and abroad, I’d expect him to be keenly aware of how US energy exports opened new opportunities on major foreign policy issues,” said Blakemore.

OPEC is king

In the meantime, the decline of US shale has put the reins of the oil market firmly in the hands of OPEC and its allies, collectively known as OPEC+.

“With demand only just showing signs of a recovery, OPEC+’s management of the supply picture is a core element of market confidence with the pace and spread of economic recovery from COVID-19 so uncertain,” said Blakemore.

Prices responded strongly to the news of continued cuts in late 2019 and a surprise cut of 1 million barrels per day (bpd) by Saudi Arabia at the start of the year.

“Over the medium-term, OPEC must continue to foster confidence that it will be able to maintain a cohesive program of supply cuts, which could become increasingly difficult demand recovery stagnates in response to slow vaccination rates or an uneven economic recovery between East and West,” he added.