TEHRAN (Iran News) – Oil Price is probably Due for a Correction, but OPEC+ Has Tools to Prevent a Crash. U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed sharply higher last week as bullish supply-side news dominated the trade, while concerns over demand continued to take a backseat despite soaring global coronavirus cases.

On the support side, investors focused on the prospect of lower supply after Saudi Arabia pledged to cut output in February and March. Additional support for higher prices came from this week’s reported drawdown in U.S. crude stockpiles.

On the demand side, the U.K. imposed new countrywide lockdowns and Tokyo declared a “soft” state of emergency. Last week, March WTI crude oil settled at $52.26, up to $3.63 or +7.46%, and March Brent crude oil finished at $55.99, up to $4.19 or +7.48%.

Saudi’s Announce Voluntary Production Cut

The event that ignited last week’s price surge was Saudi Arabia’s decision to make a big voluntary production cut.

Saudi Arabia, the world’s biggest oil exporter, agreed at an OPEC+ summit to make additional, voluntary oil output cuts of 1 million barrels per day (bpd) in February and March.

OPEC+ agreed most producers would hold output steady in February and March while allowing Russia and Kazakhstan to raise output by a modest 75,000 bpd in February and a further 75,000.

US Crude Stockpiles Tumble

U.S. crude oil stockpiles fell sharply the previous week while fuel inventories rose, the Energy Information Administration (EIA) said on January 6.

Crude inventories fell by 8 million barrels in the week to January 1 to 485.5 million barrels, their biggest decline since August, exceeding analysts’ expectations in a Reuters poll for a 2.1 million-barrel drop. The drawdown in stocks in typical for the end of the year, when energy companies take barrels out of storage to avoid hefty tax bills.

U.S. gasoline stocks rose by 4.5 million barrels last week, the biggest increase since April, the EIA said, ahead of expectations for a 1.5 million-barrel rise.

Distillate stockpiles, which include diesel and heating oil, rose by 6.4 million barrels, versus expectations for a 2.3 million-barrel rise.

US Death Toll Escalates, Cases Rise in Asia, New Lockdowns Possible

The pandemic claimed its highest U.S. death toll yet, killing more than 4,000 people in a single day, while China reported the biggest rise in daily cases in more than five months and Japan may extend a state of emergency beyond the greater Tokyo region, according to Reuters.

UK Prime Minister Boris Johnson reimposed a lockdown in England on Monday as a more transmissible variant of COVID-19 fuels a surge in infections and hospitalization in the country.

Meanwhile, a “soft” state of emergency has been declared in Tokyo and three surrounding districts as authorities tackle rising COVID-19 cases.

Weekly Forecast

The big questions facing traders is how long will the OPEC+ news support speculative buying and at what level will the rising number of COVID-19 cases and potential lockdowns weigh enough on-demand to pressure prices.?

The move by Saudi Arabia could keep oil prices propped up until February, but at some point, prices will become overextended as the focus shifts toward slower demand for gasoline and other fuels in the United States and other parts of the world due to wider restrictions to contain the spreading COVID-19 pandemic.

Severe mobility restrictions around the world to contain a surge in COVID-19 cases still weighed on fuel sales, weakening the prospect of energy demand recovery in the first half of 2021.

The demand numbers are bearish, which tells me that speculators are bolstering crude oil prices. They have placed a big bet on the vaccines stemming the surge in the virus and putting the global economy back on a path toward a speeding recovery.

Nonetheless, oil prices are ripe for a correction in coming weeks, if speculator-driven rallies are not backed by stronger fuel demand soon.

This is not going to crash prices but return them to more reasonable levels. OPEC+ can always cut production further to offset lower demand. Because of this investors will be looking to buy on any weakness because they believe that OPEC+ is their safety net and has their backs.