Crude oil prices drifted lower at the last trading session of the week. Oil prices are presently cooling off on the bias that the soaring COVID-19 cases would likely weigh on energy, coupled with the $900 billion economic stimulus package lingering at the U.S Congress.
What we know: At the time of writing this report, U.S. West Texas Intermediate (WTI) futures, dropped by 0.17% to trade at $48.29 a barrel, while Brent crude futures slipped by 0.3%, to $51.37 a barrel. However, both major oil benchmarks were within their 9 months high price level.
What this means: Crude oil prices rallied high yesterday amid optimism around progress seen in the passage of the U.S stimulus deal coupled with strong Asian refining demand and plunge in the U.S. dollar to a two-and-a-half-year low. With the black liquid hydrocarbon priced in American dollars, a weaker greenback makes oil cheaper in other major currencies.
Stephen Innes, Chief Global Market Strategist at Axi, in an explanatory note to Nairametrics, spoke on how the long-awaited stimulus deal is weighing significantly on oil prices:
“The stimulus package is unquestionably one of the key drivers pushing the oil market higher as the whole dollar-denominated commodity markets are repricing higher thanks to frothy risk markets after the FOMC reaffirmed that policy is going nowhere for a long time.
“So, the combination of low for longer rates and the anticipated US stimulus deal offered up support for broader risk markets appetite, which has proven enough to push the USD weaker.
“And the currency passthrough effect provides spot and forward price discounts to Asia buyers. Both China and India are splurging to that currency advantage as India’s refinery demand is roofing and China continues to fill storage tanks,” Innes stated.
Crude oil bulls however remain on course, on the bias that a combination of ultra-low interest rates and the long awaited US stimulus deal offered up support for crude oil prices, which has proven enough to also make the U.S dollar weaker.
OPEC+ agrees to keep Oil output unchanged, Oil up 4%
Brent Crude was up more than 4% trading around $67 a barrel.
Oil prices were all fired up at Thursday’s trading session, amid reports revealing OPEC+ agreed to Keep oil output unchanged in April.
What you should know: At the time of writing the report, Brent Crude was up more than 4% trading around $67 a barrel.
— Holger Zschaepitz (@Schuldensuehner) March 4, 2021
OPEC, Russia, and other oil producers on Thursday agreed to keep the status quo unchanged thereby pushing oil past its highest level since January 2020.
This is coming as a big win for the Saudis, which of late has been bent on keeping oil output in check.
Sequel to this landmark feat on keeping oil supply squeezed, OPEC+ had been debating considering if it was ideal to restore as much as 1.5 million barrels a day of output.
However, the Oil Sherrif in the person of Saudi’s Energy Minister Prince Abdulaziz bin Salman urged other leading oil producers in keeping the status quo with the exception of slight increases granted to the Russians and Kazakhstan.
Will Nigeria be allowed to produce more oil at this OPEC meeting?
Nigeria is hopeful that OPEC+ will agree to an increase in production.
This week brings forward one of the most important meetings OPEC+ faces in her history. After rescuing the markets from low oil prices with tight supply, the time has come to balance the market. OPEC and its non-OPEC allies, in short, OPEC+, will meet through videoconference in an offer to arrive at an agreement over how to oversee supply to the market.
The current week’s supply choice comes when oil prices have bounced back to pre-pandemic levels. Experts comprehensively anticipate that OPEC+ should increase oil production from current levels, however, questions stay over how much precisely and which nations will be influenced.
Two quotes to review
First the Saudi Energy Minister’s quote – “So I urge you today not to take for granted the progress we have made as a group over the past year. Do not put at risk all that we have achieved for the sake of an instant, but illusory, benefit,”. Prince Abdulaziz bin Salman, the Saudi Energy minister highlighting why OPEC should still tread carefully in increasing output.
Secondly, the Russia Deputy Prime Minister quoted on the 14th of February, “the market is balanced”. Alexander Novak who also co-chairs the OPEC group will be clamouring for more output.
Nigeria’s economy is struggling with its low production quota. The quota is about 1.45 million barrels a day. Although reports show that Nigeria breached its quota by producing 130, 000 barrels more to 1.6 million barrels per day. Late last year, Nigeria applied to have its baseline figure to be reviewed based on disagreements over the classification of output from the country’s Agbami field. Although the request was denied, now Nigeria is hopeful that the group will agree to an increase in production.
Nigeria had shown signs of better discipline at the end of last year, and in recognition Timipre Sylva, the Nigerian Oil minister was sent to guide other African countries in improving their oil compliance levels.
OPEC and its allies are still withholding 7 million barrels a day from the market, which represents about 7% of global supply. Most Investment banks and trading houses believe prices will soar higher because of the tight supply situation. This assertion is supported by the U.S output freeze in Texas and Iranian talks on hold with the U.S.
Although some reports still claim that the market is not as tight as it seems and prices are only up because of how financial markets or funds have gone “long” on commodities. A report from Reuters shows that ‘there might be a disconnect emerging between the strong pricing in the paper oil futures market, and the somewhat more subdued pricing in the physical crude market, especially for east of Suez cargoes.
Interestingly, the narrative the market is showing is only on the production side and does not account for the loss of demand from refineries as some Texas refineries have had poor refining margins.
At the moment, there are too many variables influencing the oil markets. On Monday, traders were assessing tensions between the U.S and Saudi Arabia as the report on the death of Jamal Khashoggi might lead to sanctions on Saudi Arabia. Saudi Arabia might take this into context and pump more in the interim.
Will there be an increase in oil production?
Sources and various energy analysts believe the group will increase production by about 500,000-1 million barrels. Personally, I feel the figure will be close to 750,000 as Saudi Arabia might not roll over their 1 million cut promise to the market. Also, no one will want another March Madness as we witnessed last year so the best strategy is to appease all parties.
Additionally, in what we refer to as scratch-my-back diplomacy, the group will consider India’s request to reduce oil prices as the current prices are hurting economic recovery. Last month, India urged OPEC and allied oil producers to ease production as their economy battles higher gasoline prices.
Nigeria needs more production capacity. India and Asia need cheaper oil. Russia wants production as they believe the markets are balanced. Saudi Arabia does not want to undo the great work it has achieved since its last meeting. In a game of musical chairs, someone will eventually lose a seat. Hopefully, Nigeria will not lose her seat and get additional barrels.
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