Oil Jumps Over 2% As Analysts Contemplate Better Than Expected 2021 Market

Saudi Aramco thinks the worst effects of the lockdowns are over: File Image/PixaBay

A powerful snowstorm in the U.S. Northeast boosting winter fuel demand coupled with plummeting U.S. crude inventories was enough to offset worries about Covid vaccine dissemination and caused traders on Monday to boost oil prices by over 2 percent. 

After government data last week showed a drawdown of 2.3 million barrels in stocks, Brent on Monday settled up $1.31, or 2.4 percent, at $56.35 per barrel; West Texas Intermediate rose $1.35, or 2.6 percent, to settle at $53.55; despite the Covid-inspired government lockdowns of the economy and human movement, both benchmarks gained nearly 8 percent in January.

A Wood Mackenzie report suggests that another 2.3 million-barrel weekly decline is expected soon.

Bill O'Grady, executive vice president at Confluence Investment Management, added, "The market is definitely going to see supply contract....this is a major rebuild season, and we're basically starting the rebuild season behind now."

The rate of consumption is such that analysts are beginning to rethink their forecasts for 2021, case in point: Goldman Sachs said oil prices could rise to $65 by July with a deficit of 900,000 barrels per day (bpd) in the first half of 2021, a higher level than the bank's previous prediction of 500,000 bpd.

But the bank acknowledged a perceived slow rollout in vaccine delivery in many countries by stating,  "We are moderating the demand rebound to account for a slower start of vaccination and a cautious pace of reopening, leading in particular to a slower recovery in jet demand."

The bank expected demand to rise by 5.3 million bpd in the six months to July, down from its previous forecast of 6.8 million bpd.

Also, while output from the Organization of the Petroleum Exporting Countries (OPEC) increased in January, the growth was smaller than expected; this prompted Phil Flynn, senior market analyst at Price Futures Group Inc., to remark, "It looks like OPEC compliance is really pushing the complex higher, as well as the expectation that we will see U.S. inventories tighten over the next few weeks."

Meanwhile, data from the Energy Information Administration showed output from U.S. oil and gas drillers rose above 11 million bpd in November, the first time it has exceeded that figure since April, and rigs were added in January for a sixth month in a row.

Another vote of confidence for a brighter 2021 came from Saudi Aramco, which on Monday predicted that oil demand would return to pre-Covid levels later this year and that the worst of the pandemic is now over.