Upcoming Webinar:Join our experts for discussion on ‘Re-inventing Finance: with Process, People & Technology’.

Crude at one-year high on OPEC supply squeeze, demand recovery; outlook remains bullish

A surge in demand is likely due to a rebound in the global economy and hopes of more fiscal stimulus measures from top economies.

February 26, 2021 / 01:32 PM IST
Source: Reuters

Source: Reuters

NYMEX oil surged to a one-year high, testing $63.81 a barrel the previous week on concerns over supply crunch amid rising global demand. Recuperating global economic momentum, weak US dollar and a forecast of a drop in inventories also aided the bullish sentiment.

The global benchmark US WTI crude has gained more than 31 percent this year, while its Asian counterpart Brent jumped to $67.70 a barrel, surging about 30 percent during the same period. Similar moves were witnessed in MCX futures as well.

As per Reuters reports, the OPEC plus producer group will keep the global market in deficit throughout the year, even though they foresee a decline in demand growth.

The group expects the global oil market deficit to reach a peak of 2 million barrels a day in May and the stockpile to slip below the five-year average by June. Earlier, the group revised downward its demand growth forecast to 5.6 million barrels per day (mbpd) for 2021 from 5.9 mbpd.

OPEC plus countries have agreed to a historic output cut in April 2020 to reduce the supply glut and to shore up prices. The record cut of 9.7 million barrels a day started on May 1, 2020 but was subsequently scaled back to 7.7 million in August. And the data show that the group’s compliance with the planned cuts was extremely high and countries like Saudi Arabia, the largest producer in the group, expect the global oil market to be in deficit by the next quarter.

Close

There was no considerable change in output from the US. Crude inventories have been declining since June and the present high levels will fall back to normal soon. Daily production in the US is still around 11 million as drillers wait for higher prices before they start increasing production.

New drilling activities have been restricted after a set of executive orders from President Joe Biden, which eventually had a positive impact on oil prices. However, the production is expected to ramp-up later this year.

Crude also got support from the proposed US stimulus package. Reportedly, the lawmakers are now closer to approving Biden’s $1.9-trillion stimulus aid bill without the support of the Republicans.

COVID-19 vaccination programme in hard-hit countries also increased economic optimism and revived demand for fuel. The economic condition was extremely turbulent last year as lockdowns in many countries dented economic and financial activities.

The bullish appeal in prices may continue due to demand-supply dynamics. A surge in demand is likely due to a rebound in the global economy and hopes of more fiscal stimulus measures. A possible end of the pandemic due to vaccination is likely to boost industrial and economic activities and thus the demand for fuel. The production policies of OPEC and the US may also reduce the supply glut and balance the market.

On the NYMEX, consistent trades above $57 a barrel would extend the bullish outlook towards $64 initially, followed by $69/74. A close below $49 will be an immediate downside reversal point. On MCX, Rs 3,800 a barrel would act as stiff support to edge higher towards Rs 5,200 or even more in the near future.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Hareesh V
first published: Feb 26, 2021 01:28 pm

stay updated

Get Daily News on your Browser
Sections