The price of Brent crude oil closed last week at $59.34 after closing the previous week at $55.88. In similar fashion, the price of WTI closed at $56.85 after closing the previous week at $52.20. The significant uptick in prices broke the recent trend of the last several weeks, during which prices were slowly creeping upwards. Oil prices are now back at a level last seen in January of 2020. In comparison, the price of Brent crude hit a low of $19.33 on April 21, 2020 and was still only at $37.94 on October 30, 2020.
The increase in prices was supported by reports that OPEC increased production by only 160,000 b/d in January, which is less than OPEC’s share (300,000 b/d) of the agreed production increase of 500,000 b/d that was to occur in January. Another factor was indications that the Biden Administration will be moving forward with the $1.9 trillion stimulus/recovery package with or without Republican support – which pushed up equity markets and commodities, in general.
In addition to the above factors, there are several other factors that support the view that oil prices will continue to go higher:
- Besides the $1.9 trillion stimulus/recovery package coming on the back of the $900 billion stimulus/recovery package that was passed at the end of the last year, the Federal Reserve is expected to continue with its easy-money policies.
- There has been some positive news pertaining to COVID-19 in that the number of cases in the US (and in other countries, such as India) has been declined significantly since early in January, and that there is another vaccine on the verge of entering the market.
- While the above two factors will encourage increased demand, there are factors that are discouraging additional supply, including the 60-day moratorium pertaining to new leases and drilling on federal lands in the US.
- Other factors that will hinder future supply include increased regulatory pressures, and the effort to push divestment of positions held in the oil & gas sector, which is being led by major financial entities, such as Blackrock Inc., the world’s largest asset manager.
There are risks associated with oil prices continuing to increase, including that the refining sector – the only consumer of crude oil continues to struggle with product inventories that are still elevated, and demand still well below pre-pandemic level. Another risk is that the price recovery relies heavily on the ongoing existence of the OPEC+ framework -- and is a risk that Stratas Advisors has been highlighting for a while. With increasing prices, the pressure on the OPEC+ framework will only continue to grow with many of the producers already pushing to increase production. The framework has only held in place this long because of the willingness of Saudi Arabia to reduce its production to around 8.1 million b/d. The risk is further amplified by the apparent shift in US policies pertaining to the Middle East with the arrival of the Biden Administration. The Saudis may not be so open to reducing its own production unilaterally and giving up market share to prop up prices, in the face of a less-friendly US administration.