Oil prices fell their most in a week after the first U.S. crude build in six weeks on the fear that the world’s largest economy might distort energy demand/supply rebalancing.
What you must know: U.S based oil contract, West Texas Intermediate, lost 1.6%, at $52.27 per barrel. It was WTI’s worst daily plunge since last Friday when it fell 2.2%.
- But for the week itself, the U.S. crude contract lost about 0.2%.
- British based Brent, the global benchmark for crude, settled 1.4%, at $56.10.
- The gain in crude oil inventories coincided with President Joe Biden’s recent statements calling on its citizens for tough days ahead from the Covid-19, which could kill up to about half a million Americans.
Stephen Innes, Chief Global Market Strategist at Axi, in a note to Nairametrics, gave valid insights on the effect COVID-19 and other macros have on oil prices.
“Oil prices look a tad vulnerable to potential profit-taking after US crude stockpile bearishly rose 2.56 million against consensus draw. Simultaneously, the near-term China crude demand forecast looks high and susceptible to revision lower as lockdown spread in the country ahead of the Lunar New Year
.“While oil traders see through longer lockdowns on the premise that vaccinations will quickly lead us out of the pandemic, COVID mobility clampdowns still hurt the very near-term view.
“And since calls for a commodity supercycle have been many after the November vaccine turnaround, open interest in Brent and WTI has increased hugely, suggesting that the market remains very susceptible to any potential bearish headlines big or small, from a positioning perspective alone.”
What to expect: OPEC production at the moment remains well below the level required to meet anticipated demand. It should continue to drive a reduction in oil inventories as the global economy gradually recovers.
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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