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Oil market remains over-supplied and re-balancing remains "fragile", says International Energy Agency

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The oil market has seen a rally in the last couple of weeks supported by the global vaccine drive and OPEC’s curtailed oil supply. 

American crude inventories fell by 6.5 million barrels this week at a time where the market was expecting an increase.

In Friday trading, Brent crude was still holding above US$60 with West Texas intermediate (WTI) above US$57 a barrel.

Brent crude hits 13-month high

Brent crude hit a 13-month high above US$61 a barrel midweek with WTI not far behind.

Analysts will be carefully watching this rally, and a report from Rystad energy said “the current prices are healthier than the markets,” as producers wait for demand to return.

The CEO of CMarkits Dr. Yousef Alshammari said the recent price rally should present good news for OPEC+, but reminded us to look carefully at the speed of the increase.

“Prices have recovered much faster than demand and I think there is a good reason for OPEC+ to remain cautious in their upcoming meeting.”

Demand continues to be 6-7% below pre-crisis levels, “especially in aviation which is 60% below its level in 2019″.

Many analysts think OPEC and friends will leave production as is, with the possibility that Saudi Arabia might suggest reinstating its one million barrel temporary reduction later in the year.

OPEC monitoring meeting in March

The OPEC ministerial monitoring committee will meet the first week in March.

A note from Capital Economics says it expects less oil from Saudi Arabia and Libya for February, and “this should deepen the global market deficit and support prices”. 

The International Energy Agency and OPEC both issued their monthly oil market reports this week, with OPEC observing, “major physical crude benchmarks increased about 10-percent month-on-month on improving market fundamentals, particularly the prospect of tighter crude supply and the declining trend in global oil stocks.”

Improved performance in the global economy in the second half of 2020 gave OPEC optimism to look towards recovery in economic activity as witnessed in some Asian economies.

Global oil demand is estimated to have declined by 9.7 million barrels a day in 2020 to average 90.3 million barrels a day.

According to the February oil market report, OPEC expects oil demand for 2021 “to increase by 5.8 million barrels a day,” revised down slightly from last month’s projection, to average 96.1 million barrels a day.

The IEA says the market remains over-supplied and warns that the re-balancing of the oil market remains “fragile” given the ongoing pandemic fallout and weak demand.

The IEA cut its forecast for global oil demand for 2021 by 200,000 barrels a day mainly due to lack of travel and subdued economic activity.

Slow vaccine rollout in Europe

The IEA is concerned about new lockdowns and mobility restrictions and “a rather slow vaccine rollout in Europe have delayed the anticipated rebound”.

Looking outside of OPEC production, the IEA says it expects an increase of 400,000 barrels from non-OPEC producers as the stronger price and economic recovery could boost investment.

Despite a shift in mood for the oil sector from the Biden administration, the IEA says it expects shale players “to take advantage of higher prices to increase spending”.

The wider global commodity markets have all been performing well in recent weeks with some suggesting the time for a super cycle. 

Despite stagnant demand, oil continues to find strength, but we need to remember that supply remains more than plentiful and any addition production could tip the balance in the fundamentals with great speed.

Story by ProactiveInvestors


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