Strong Weekly Gains For Crude As Analysts Now Suggest Market Might Become Undersupplied

Goldman, UBS forecast crude price rises this year and next: File Image/PixaBay

After several days of gains, oil prices on Friday flattened due to concern over a prospective production ramp-up by Libya; however, the commodity still made substantial gains for the week.

Following eastern Libyan commander Khalifa Haftar announcing he would lift his blockade of oil output for one month (something that had slashed the country's production to just over 100,000 barrels per day from around 1.2 million bpd previously), Brent fell 15 cents to settle at $43.15 per barrel but rose 8.3 percent for the week.

West Texas Intermediate rose 14 cents to settle at $41.11 per barrel and gained 10.1 percent for the week.

Libya had caused earlier losses but Friday's largely positive settlement was said to be due to Saudi Arabia hinting they're prepared for new production cuts and criticizing members of the Organization of the Petroleum Exporting Countries (OPEC) that have cheated on production quotas.

Bjornar Tonhaugen, head of oil markets at Rystad Energy, said, "The alliance showed strength and reassured the market that if further action will be needed to discipline sub-compliers and balance the market, it would be taken."

Also, after weeks of fears that rising Covid infections was causing demand recovery to stall (something economic data did not support), analytical sentiment on Friday shifted in some quarters to the notion that the oil market might actually wind up being undersupplied.

Goldman Sachs predicted a market deficit of 3 million bpd by the fourth quarter and reiterated that Brent would reach $49 by year end and $65 by the third quarter of 2021; Swiss bank UBS also hinted at a possible undersupply by forecasting that Brent would rise to $45 in the fourth quarter and to $55 by mid-2021.

Supporting the prospect of undersupply but by no means good news for U.S. shale was the latest data from Baker Hughes, which showed that country's rig count, an early indicator of future output, falling by one this week to 179, its lowest since mid-August.

Meanwhile, the spread between WTI's nearest contracts strengthened to its narrowest contango structure in roughly a month, thus easing concerns of oversupply: "When you have the contango start to narrow, owners of crude oil are going to be less likely to stuff barrels into storage," explained Bob Yawger, head of the futures division at Mizuho Securities.