Saudi Cuts Minimize Crude Losses As Virus Infection Concerns Intensify

Meanwhile, analysts think oil stocks will decline this year despite demand concerns: File Image/Pixabay

After a strong week for oil prices it was perhaps inevitable that traders would resume their concern about Covid rates rising despite strict lockdowns throughout the world, and as a result  Brent on Monday fell 33 cents to settle at $55.66 per barrel, while West Texas Intermediate rose 1 cent to settle at $52.25 per barrel.

However, Bjornar Tonhaugen, head of oil markets at Rystad Energy, said, "Today the correction is not massive, rather a logical adjustment caused by some bearish demand signals and by a strengthening U.S. dollar."

He added, "Although oil prices are declining today, the Saudi move is still keeping them at quite high levels," a reference to Saudi Arabia pledging last week to cut oil output by 1 million barrels per day (bpd) in February and March.

For the record, Goldman Sachs believes that despite demand being pummelled by the lockdowns, as a result of the Saudi cuts it sees a small deficit in February (a revision from an implied build of 0.6 million bpd previously) and forecasts the oil market to be in deficit for the remainder of the year, peaking at 2.3 million bpd in September, or nearly 3 percent of global oil supplies for that month.

Tonhaugen foresees even bigger deficits: "We see crude stocks decreasing by 1.3 million bpd for February, and 0.8 million bpd for March," he said.

As for the momentum of bullish investors, John Kemp, commodities analyst at Reuters, noted that hedge funds and other money managers purchased the equivalent of 14 million barrels of futures and options in the six most important contracts in the week ending January 5, and that this takes total purchases to almost 400 million barrels since the first successful Covid vaccine trials were announced in early November.

However, in the most recent week fund managers added 43 million barrels of bullish long positions, but also 30 million barrels of bearish short ones, the largest increase for two months: "From both a positioning perspective and a fundamental one, it is no longer obvious prices will extend their recent blistering rally rather than pull back temporarily," Kemp said.

He added that while most fund managers remain bullish over the eventual return to normal and resumption of air travel, "the changing risk profile has sapped the rally of its earlier buying momentum and caused a minority to start anticipating a short-term correction."