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Mar 5, 2021

Oil soars above US$66 with Saudi supply gamble buoying crude bulls

Saudi oil minister says days of 'drill, baby, drill' are over

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Oil rallied to the highest in nearly two years in New York after OPEC+ shocked markets with a decision to keep supply limited as the global economy starts to recover from the pandemic-driven slump.

U.S. benchmark crude futures topped US$66 a barrel on Friday, while its global counterpart Brent edged closer to the key US$70-a-barrel level. The producer alliance’s aggressive supply management and the continued rollout of vaccines worldwide has aided a stellar rebound for crude since the depths of the coronavirus-related fallout. OPEC+’s surprise decision on Thursday to keep output steady in April has accelerated those price gains, spurring a wave of upgrades in oil price forecasts by major banks and a surge in the market’s structure.

“In some ways, even more important than the lack of oil, was the message that came with it: They’re not really worried about price, not worried about tightening,” said Paul Horsnell, head of commodities research at Standard Chartered Plc. “In the short-term, certainly through to the April meeting, the market can go where it wants. The door is wide open to prices beyond US$70.”

Crude in New York has soared over 35 per cent so far this year, setting multi-year highs with OPEC+ output restraint holding the market over until a full-fledged comeback in consumption. The group’s latest decision represents a victory for Riyadh, which has advocated for tight curbs to keep prices supported.

“Overall, this was the most bullish outcome we could have expected,” JPMorgan Chase & Co. analysts including Natasha Kaneva wrote in a note to clients.

The Organization of Petroleum Exporting Countries and its allies including Russia had been debating whether to restore as much as 1.5 million barrels a day of output. As part of Thursday’s agreement, Russia and Kazakhstan were granted exemptions, allowing them to increase supply marginally in April.

Saudi Arabia’s bold and unexpected gamble to restrain production is founded upon its view that, this time around, higher prices will not lead to a big increase in output by American shale drillers. Saudi Energy Minister Prince Abdulaziz bin Salman said in an interview after the meeting that shale companies were now more focused on dividends.

Prices:

  • West Texas Intermediate for April delivery advanced US$2.18 to US$66.01 a barrel at 12:34 p.m. in New York, the highest intraday level since April 2019
  • Futures are poised for the largest weekly gain in a month, up more than 7 per cent so far this week
  • Brent for May settlement climbed US$2.48 to US$69.22 a barrel

Oil’s rebound this year stands to intensify the debate about a potential resurgence in inflation, and complicate the task facing the Federal Reserve as it supports the U.S. recovery. The Treasury market is already looking for signs of faster price gains, with yields rising rapidly. Meanwhile, U.S. employers added more jobs than forecast in February.

Goldman Sachs Group Inc. raised its Brent forecasts by US$5 a barrel and now sees the global crude benchmark at US$80 in the third quarter. JPMorgan increased its Brent projection by US$2 to US$3 a barrel and Australia & New Zealand Banking Group Ltd. boosted its three-month target to US$70. Citigroup Inc. said crude could top US$70 before the end of this month.

Change Course

Oil rising to these levels will likely increase strains within OPEC+ as some members will want to pump more to relieve under-pressure economies, Citi said in a note. Top importers such as China and India would also not be happy and the alliance is likely to change course at its next meeting, it said.

The lack of fresh supply was reflected in oil’s futures curve. Brent’s prompt timespread widened to as much as 73 cents in backwardation -- a bullish structure where near-dated prices are higher than later-dated ones -- from 54 cents Thursday. Gauges further along the oil futures curve also surged.

“We’re going to continue to draw inventory at a much faster rate than we had expected just two days ago,” said Andrew Lebow, senior partner at Commodity Research Group. “Moving forward, if demand continues to improve, there’s certainly a chance of a serious supply shortage.”

Related news:

  • Major oil sands producers in Western Canada will idle about half a million barrels a day of production next month, helping tighten global supplies as oil prices surge.
  • The impact of the pandemic in Brazil and Mexico is cooling demand for gasoline and diesel in two top markets for U.S. refiners.
  • OPEC+’s surprise move to keep a lid on crude exports is hitting oil tanker owners afresh.
  • Famed oil trader Pierre Andurand is predicting the beginning of a bull market in commodities after his hedge fund surged 12 per cent last month.