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.

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U.S West Texas Intermediate (WTI) crude gained 11 cents, or 0.23%, to trade at $48.23 per barrel, while Brent crude futures advanced 10 cents, or 0.2%, to $51.30 per barrel. Volumes were light on the last trading day before the Christmas holiday.

Both contracts gained more than 2% on Wednesday.

By clinching a Brexit trade deal, Britain avoids a chaotic departure from one of the world’s biggest trading blocs, a move many investors warned would have sparked further volatility in financial markets.

“While the Brexit deal is supportive, the impact of COVID is the dominant driver in the oil market,” said Andrew Lipow, president of Lipow Oil Associates, in Houston, Texas. “Like everyone else the oil market is waiting for the wider distribution of vaccines to get the public back on the road and in the air.”

U.S. stockpiles fell in the most recent week in what some hoped was a signal that demand would recover after a torrid year in which gasoline and jet fuel consumption plummeted as a result of the pandemic.

U.S. crude inventories fell by 562,000 barrels in the week to Dec. 18, according to government data, while gasoline and distillate stockpiles also fell.

However, new strains of the coronavirus, which appear to spread the disease more quickly, have hit the United Kingdom, Nigeria, and other countries. “Lingering worries over a new variant of the novel coronavirus capped gains,” said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

At least four drugmakers expect their COVID-19 vaccines will be effective against the new fast-spreading variant of the virus that is raging in Britain and is performing tests that should provide confirmation in a few weeks.

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Brent crude futures fell 71 cents, or 1.4%, to $49.37 a barrel at 0646 GMT, while U.S. West Texas Intermediate (WTI) crude futures slid 67 cents, or 1.4%, to $46.35 a barrel. Both contracts fell nearly 2% on Tuesday, already a second straight session of declines.

As well as doubts on the U.S. situation, the oil market remains jittery about the future recovery of demand as a new, highly infectious strain of the novel coronavirus has hit Britain, prompting much of the world to shut its borders to the country.

“This is the holiday period when people go out and that prompts fuel demand. But now, a majority of flights have been canceled to and from the UK, so this is going to impact oil demand (overall),” said Ravindra Rao, vice president, commodities at Kotak Securities.

“Sometime earlier, the expectation was that the virus threat was subsiding, and demand was slowly and slightly moving higher. But with this update of the new coronavirus strain, the market is purely operating on sentiment right now that it is going to create more restrictions.”

The American Petroleum Institute (API) reported on Tuesday that U.S. crude inventories have risen by 2.7 million barrels in the week to Dec. 18, compared with analysts’ expectations for a draw of 3.2 million barrels.

“Rubbing salt in the oil market wounds today, oil prices lurched lower after yet another inventory build that was very much bearish to consensus,” Axi chief market strategist Stephen Innes said in a note.

Oil also took a hit after Trump threatened not to sign an $892 billion coronavirus relief bill, saying he wants Congress to increase the amount in the stimulus checks which lawmakers approved on Monday.

Covid-19 cases continued to surge in the United States, with more than a million new cases in just six days, and Americans were warned again to avoid traveling for Christmas, further dampening fuel demand.

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“Oil’s reacting to pretty significant increases in risk appetite,” said Bart Melek, head of global commodity strategy at TD Securities. “But with the second wave probably continuing to damage demand growth and inventories likely staying at somewhat elevated levels, the market is having second thoughts about going materially higher.”

Prices edged lower following settlement after the industry-funded American Petroleum Institute was said to report domestic crude supplies rose by almost 2 million barrels last week. Earlier, the International Energy Agency trimmed its demand forecast for 2021 and said the crude oil glut left behind by the coronavirus pandemic will not likely clear until the end of next year.

Oil futures have surged recently to highs not seen since the pandemic sent prices for a tailspin, supported by indications that a widespread vaccine rollout will boost the economy and aid demand. Imported containers loaded at the Port of Los Angeles in November increased by roughly a quarter year-over-year, signaling a bump in demand. Still, the IEA’s dismal demand projections follow OPEC’s decision to cut its own forecasts for consumption in the first quarter of 2021 as the group and its allies prepare to start returning some supply to the market from January. Meanwhile, in the U.S., the number of Americans taking road trips during this Christmas is set to decline as much as 25% as people stay home amid soaring virus cases, according to GasBuddy.

“People are forgetting that there’s a couple of triggers that have to happen before oil demand really comes back,” said Stewart Glickman, energy equity analyst at CFRA Research. “The first half of the year we’re going to see some resurgence of weakness in oil demand because it’s going to take time before everybody feels comfortable enough for things to start reopening fully.”

PRICES

• West Texas Intermediate for January delivery was trading at $47.55 a barrel as of 4:41 p.m. in New York after settling at $47.62 a barrel
• Brent for February settlement gained 47 cents to end the session at $50.76 a barrel, the highest since early March

The nearest portion of the futures and swaps markets are highlighting the mixed outlook. Brent’s prompt time spread was on the verge of a flip back into contango, where near-dated contracts are cheaper than later ones. That compares with a bullish backwardation of as much as 18 cents last week. At the same time, the Middle East Dubai benchmark has been moving further into backwardation.

The API report also showed refined products rose last week, with distillate supplies notching a 4.76-million-barrel build last week. If confirmed by the Energy Information Administration’s storage figures on Wednesday, that would be the third week in a row that distillate inventories rose after more than two months of consecutive draws.

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The coalition known as OPEC+, which comprises some of the world’s largest crude producers, will begin a two-day meeting Monday to discuss the next phase of its production policy.

It agreed to the largest single output cut in history back in April, but that reduction of 9.7 million barrels per day was subsequently scaled back to 7.7 million in August. Taking oil off the market, with OPEC kingpin Saudi Arabia often bearing the brunt, usually boosts crude prices and helps their commodity-focused economies.

A planned 2 million BPD January production ramp-up looks set to be delayed, according to market consensus, with analysts differing on whether that would be for three months or six months.

Caroline Bain, the chief commodities economist at Capital Economics, believes the meetings on Monday and Tuesday won’t spring any surprises, saying an extension of the production cut is largely priced in.

“We now think that the oil price (Brent) will stand at $60 per barrel by end-2021,” she said in a research note Friday, revising forecasts due to the encouraging vaccine trial data from pharma giants that could help reopen economies after the coronavirus crisis.

Many market watchers see both oil benchmarks at, or around, $50 a barrel over the next year as demand slowly builds after the shock seen in March and April. The price of U.S. oil plunged into negative territory during the first wave of the pandemic as Saudi Arabia and Russia stuttered over an output deal. But Brent crude futures now stand at $48.18 a barrel, with U.S. West Texas Intermediate futures at $45.52.

Ron Smith, an oil and gas analyst at BCS Global Markets, believes there are reasons to be bullish on prices, especially on a six-month view. In a research note emailed to CNBC last week, he said that oil could go to the mid-$50s by the end of 2021.

But both Smith and Bain point out that OPEC+ will be keeping a keen eye on U.S. shale producers, and would be loath to allow them to significantly re-ramp production without increases of its own.

The U.S. industry is now a key swing supplier in global markets and has been a thorn in the side of OPEC for the last decade — gradually taking on more market share at OPEC’s expense. The recent rally in oil prices could supercharge a return in American rig counts — which have just seen their 10th weekly increase in 11 weeks.

BCS Global Markets are therefore cautious on the recent price rally, despite their bullish outlook. The investment bank says there is substantial supply waiting in the wings from OPEC+ and “hyper-dynamic U.S. shale producers itching to drill again.”

″(Rig activity) was rising steadily this fall, even before oil began its most recent rally. We think that as oil prices head towards $50/bbl, a key inflection point may be crossed, accelerating U.S. oil drilling activity and, with a small lag, oil production,” Smith said.

“We are watching OPEC+, which in turn is likely watching for any reaction from U.S. shale producers,” he added.

Bain also concluded that a gradual recovery in U.S. production, alongside the return of “some” OPEC+ supply, will act as a ceiling on oil prices in the not too distant future.

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Figures showing a rebound in the world’s second and third largest economies, China and Japan, also supported prices, along with data that Chinese refineries processed the most crude ever in October on a daily basis.

Brent crude futures for January rose 44 cents, or 1%, to $43.22 a barrel by 0204 GMT, while U.S. West Texas Intermediate crude for December was at $40.67 a barrel, up 54 cents, or 1.4%.

“Fundamentally China’s numbers do support why oil prices can keep at these levels,” OCBC economist Howie Lee said.

Both contracts gained more than 8% last week on hopes of a Covid-19 vaccine and that the Organization of the Petroleum Exporting Countries (OPEC) and their allies including Russia will maintain lower output next year to support prices.

The group, also known as OPEC+, has been cutting production by about 7.7 million barrels per day, with a compliance rate seen at 101% in October, and had planned to increase output by 2 million bpd from January.

OPEC+ is due to hold a ministerial committee meeting on Tuesday which could recommend changes to production quotas when all the ministers meet on Nov. 30 and Dec. 1.

However, the speedy recovery of oil production in Libya, an OPEC member, back to above 1.2 million bpd presents a challenge to OPEC+ cuts, while a slowdown in traffic across Europe and the United States dampened fuel demand recovery hopes this winter.

“European motorway traffic is down almost 50% in recent weeks in some countries (such as France) as lockdown measures are increased,” ANZ analysts said.

People movement on highways in the United States was also slowing based on vehicle mileage data despite authorities’ reluctance to implement new restrictions, they added.

While fuel demand is slowing, Baker Hughes’ data showed that the U.S. oil and natural gas rig count rose last week to its highest since May as producers, spurred by higher crude prices, return to the wellpad.

ANZ analysts expect the oil surplus to increase to between 1.5 million and 3 million bpd in the first half next year with a vaccine only boosting demand in the second half.

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The Organization of the Petroleum Exporting Countries and allies including Russia made a record oil output cut in April as the pandemic hit demand. They are scheduled to increase output in January as part of a gradual easing of supply curbs.

OPEC’s Mohammad Barkindo, asked at the virtual India Energy Forum by CERAWeek if the second wave of the virus required any changes to OPEC+ strategy, said hopes earlier this year of a demand rebound had been disappointed.

“We were hopeful the second half of 2020 would begin to see a recovery,” Barkindo said. “Unfortunately, both the economic growth and demand recovery remain anemic at the moment due largely to the virus.”

“We remain cautiously optimistic that the recovery will continue. It may take longer, maybe at lower levels, but we are determined to stay the course,” Barkindo added.

Russian President Vladimir Putin, speaking last Thursday, did not rule out extending the oil cuts for longer if market conditions warranted.

Barkindo said producers did not expect a renewed oil-price collapse as seen in the second quarter, when oil hit historic lows with U.S. crude briefly trading in negative territory.

OPEC+ producers had met an average of 100% of their supply cut commitments and would continue to implement the curbs so that inventories fall further, Barkindo said.

“We are determined to assist the market to restore stability by ensuring that the stock drawdowns continue.”

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IRAN NEWS ECONOMIC DESK

TEHRAN – Oil Minister Bijan Namdar Zanganeh yesterday reiterated that the ministry refutes reports that it is to increase the price of fuel oil.

Speaking on the sidelines of a ceremony for signing 13 oil agreements in Tehran, Zanganeh said that he does not know who is behind this allegation that the government is to increase the price of fuel oil, rejecting all allegations on price hike of the fuel oil.

On the shortage of liquefied gas in Sistan and Baluchistan Province, he said that unfortunately citizens of the province are facing shortage of the liquefied gas, adding that he has ordered for shipping more liquefied gas to the province to meet the demands of the residents, and this problem will be resolved soon.

On the value of the agreements signed in the ceremony, Zanganeh said that these agreements are valued at over 1500b tomans. He said that these 13 agreements can boost exploitation from the oil and gas fields.

He said some nine more agreements had been earlier signed, adding that now 50 percent of national oil reserves are under coverage of these researches and hundreds of students and experts are working on them and will present hundreds of papers and articles.

Zanganeh praised the role and value of universities, saying that their value is not less than oil production in those oil fields.

He went on to say that university and industry should work together and they are correlative, adding that all should be patient because universities are the transplanted heart of oil industry and this transplantation has happened now.

He said this time universities stepped forward for signing the deal voluntarily and they welcomed the ministry’s proposals.

He also blasted the monopoly, adding that monopolization is not a good thing and competition is valuable.

Zanganeh also said that some good and important agreements have been signed in the downstream of oil industry which need support in order that the country can possess license and knowhow.

He also pointed to the beginning of the Sacred Defense Week, saying that jihad should continue in all layers of the life and today the country is alive because of efforts of unknown jihadis who continued their endeavors after the eight-year war in different fields.

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