Oil Prices Leap Upward Due To Saudi Commitment To Maintain Balanced Market

Meanwhile, analysts reiterate their optimism for a 2021 demand rebound: File Image/Pixabay

As expected by some analysts, oil prices on Tuesday jumped a massive 5 percent on the strength of Saudi Arabia volunteering to make additional output cuts of 1 million barrels per day (bpd), a move seen as contributing to market stability until enough Covid vaccinations are accomplished globally to end the pandemic - and the accompanying economic restrictions.

Brent rose $2.51, or 4.9 percent, to settle at $53.60 per barrel, while West Texas Intermediate ended $2.31, or 4.9 percent, higher at $49.93 per barrel.

The Saudis will make their cuts in February and March and are part of a deal to persuade other members of the Organization of the Petroleum Exporting Countries (OPEC) to hold production steady; prince Abdulaziz bin Salman, energy minister for the Saudis, said, "We are the guardians of this industry."

Bjornar Tonhaugen, head of oil markets at Rystad Energy, said, "Saudi Arabia put the cherry on the cake and if there is one way to describe what its voluntary cut means for the market, 'happy hour' is a pretty fitting term."

Oil prices on Tuesday were also said to be supported by Iran, which on Monday seized a South Korean tanker in the Gulf and demanded that Seoul release $7 billion in funds frozen under U.S. sanctions.

Another influence on prices, U.S. stockpile numbers, was mixed on Tuesday as American Petroleum Institute data showed that crude inventories fell by 1.7 million barrels in the week to January 1 to about 491.3 million barrels, while both gasoline and distillate inventories rose.

Meanwhile, John Kemp, commodities analyst at Reuters, struck a cautiously optimistic note on Tuesday when he stated that "Fund managers still expect vaccination programs to restore oil consumption over the course of this year, while OPEC+ continues to restrict production, leading to a persistent drawdown in oil inventories.

"But the risks are concentrated on the downside, from a short-term resurgence of the virus, an unexpectedly slow deployment of vaccines, a lingering business cycle downturn, or a premature increase in OPEC+ output."

Kemp added that hedge funds ended 2020 with the most bullish position for oil for 11 months, in anticipation that the vaccines will return the world to normal by the end of this year.

The vaccines and a "macro economic recovery" this year were cited by Goldman Sachs as the reasons why energy stocks have risen by more than 36 percent since their lows in April; the bank also sees a "further 20 percent upside" for some big oil stocks.