Dubai: Global oil prices breached the psychological threshold of $50 a barrel as back to back approvals of Covid-19 vaccines sparked hopes of a faster revival in crude oil demand.
Brent crude prices closed at $49.97 a barrel on Friday, while US crude was trading at $46.56. Oil prices have more than doubled since hitting record lows in April.
“Current prices reflect a market that completely ignores the fragility it is still in for the short-term,” said Paola Rodriguez-Masiu, Senior Oil Markets Analyst at Rystad Energy. “Traders have decided to look past it and focus on the eventual “back-to-normal” once the vaccines are deployed”
Despite the current optimism, the situation of glut supply will not go away any time soon.
“Our short-term balances point to a market that continues oversupplied throughout the first quarter of 2021, albeit exhibiting moderate stock builds,” said Rodriguez-Masiu.
But even though signs are emerging of a revival in demand for gasoline and diesel, refiners are not keen on taking in more crude as refining margins are at multi-year lows. “The bullish crude price increase is turning bearish for margins and forcing refiners to further trim runs,” said Rodriguez-Masiu.
The OPEC and its allies, collectively known as the OPEC+, agreed to increase output by 500,000 barrels per day (bpd) in January.
If the deal is kept in place for February and March, there will be an oversupply of 1.6 million bpd in the first quarter of 2021, said Wood Mackenzie.
“We expect Brent to hold a floor near $40 per barrel in January and average at least $45 per barrel for the month with this agreement,” said Ann-Louise Hittle, Wood Mackenzie vice president.
The slugging pace of improvement in oil demand along with higher output from Libya and Iran in recent months has left little room for OPEC+ countries.
But, “even with these considerable challenges, collective OPEC+ compliance has been pretty good in 2020,” said Edward Bell - Senior Director, Market Economics, Emirates NBD Research.
“We are confident that decent levels of compliance will carry over in 2021, particularly as the bloc also extended the ‘make up’ period to allow countries that failed to hit targets earlier to cut deeper in compensation,” Bell added.
Emirates NBD, which expects oil prices to average $50 a barrel next year, added that the “strains of keeping output restrained for so long… could lead to more heated debate at upcoming OPEC+ meetings.”