Brent oil prices spiked above $71/bbl in early Asian hours on Monday, March 8. The factor that played a role in this outcome is most probably fears around supply disruption from Saudi Arabia, after another combined drone and missile attack on some of its facilities by Yemen-based forces over the weekend. After these fears quickly faded, quotes were seen to go back to normal within the next two working days and now more adequate levels below $68/bbl can be seen. The morning low in European time on Wednesday was near $66.7/bbl, where the oil market found at least an intraday support. But, oil price movements continue at a much higher level than they were several weeks ago.
This big price change was seen to be mainly due to some residual activity in the footsteps of a ballyhoo, which accompanied the meeting in Vienna of the Organisation of the Petroleum Exporting Countries and its allies. The so-called OPEC+ informal club just negotiated the important decision to abandon its potential increase of April’s oil production by 500 thousand barrels per day (bpd) which was previously discussed. OPEC+ may retrace the train of thoughts to increase production in May, but the market is feeling comfortable enough as the world industrial production, and therefore, the fuel demand is also growing. For further balance of the market, it is necessary that export supply does not grow at a faster pace than demand.
What's also important from that point of view, is that Saudi Arabia voluntarily decreased its production by 1 million bdp for another month,, promising to return volumes back to normal when it is deemed necessary. Against this background, the return of Texas oil production after the snow storms stopped seemed to do little to improve production levels, especially since the U.S. total production is only returning to its usual levels now. Oil inventories in U.S. storages rose by an unusually high volume of more than 21 million barrels last Wednesday, but this was due to the forced downtime of the petroleum refineries in the Texas region. Inventories of crude oil are expected to start declining again in a natural way this week. And also, the decision made by OPEC+ may signal the intention of the exporting countries to continue to reduce that figures on a longer-term base, which is a recovering balm to the commodity market's spirit.
Russia and Kazakhstan again received an exception to the OPEC+ rules, so these two countries may increase production from April but only for their internal consumption, not for exports. Recently this fact has been seen to cause increased levels of attention to detail and mutual confidence within OPEC+, compared to almost complete discord in March 2020, when OPEC+ could not agree on any production quotas at all. Now, the OPEC+ parties tend to make all sorts of concessions. The Gulf countries with low domestic consumption, whose budget is greatly dependent on exports, even agree to squeeze supplies in a self-imposed or one-way fashion for the sake of higher prices, but they allow other countries with higher domestic fuel needs to not follow the Arabic path of "starvation diet" exactly. This generous approach indicates the expectation of rapid increases in demand in the nearest months.
“Fundamentals remain incredibly supportive, especially with Saudi Arabia in full control pursuing a tight oil policy,” Reuters quoted the chief global markets strategist of Axi, Steven Innes. Even before the OPEC+ meeting, he wrote: “The positive momentum continues in the oil complex, with investors unabashedly predisposed to a bullish view.” There are sufficient grounds to agree with this point of view, perhaps. However, the fact that prices are extremely unstable at levels above $70 per barrel is also natural.
The last time Brent oil was traded at such super elevated levels was on January 3-8, 2020. It happened not only before the virus era, but also under the influence of Iran's decisive response by firing missiles at some American facilities in Syria after the assassination of general Qasem Soleimani, a very popular person in Iran. It was just a peak of geopolitical aggravation on that occasion. So, the political "bonus" was added to the normal price levels but then the prices were quickly returned to levels below $65/bbl in several days and then below $60 just two weeks later. So, life has shown in 2020, even before the virus, that the prices above $70/bbl were very doubtful and short-lived in the market. Therefore, it is not surprising that oil quickly came back to trade lower in March of 2021. This does not negate the more respectful attitude for the higher oil price range.
Even if oil prices slip lower again, prices are expected to be able to settle in a rather calm range with the possible margins of $62 to $68 per barrel. At least, the probability of such a basic scenario looks to be higher than the more negative scenario with a fall in prices below $60 per barrel for a long time. It is noteworthy to mention that until recently, any price of $60/bbl or above seemed to become the limit of all dreams for crude producing countries. But now markets seem to not even be particularly afraid of sliding prices to those levels. The mark of $60/bbl, if not even higher levels, may serve rather as the vicinity of lowest possible reference points for the prices of the considered range. Thus, the former hopes of the market became just a subject of moderate concern at the moment. This very idea is seen to give oil traders a good boost of optimism on the long-term horizon. When the former hopes of the oil market now play the role of a spook story, that doesn't seem to serve as a trailer that is shown before a real horror show.
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