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Oil hits $60 for first time in a year as supply cuts outweigh lockdowns

1 year ago
in Market
Oil hits $60 for first time in a year as supply cuts outweigh lockdowns
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Oil prices have hit $60 a barrel for the first time in a year, largely erasing their coronavirus-related losses as traders position for a tighter market due to producers’ supply cuts and a sharp drop in industry investment.

Brent crude, the international benchmark, reached a high of $60.27 a barrel on Monday — its highest since January 2020 — before giving up some of the gains. It was still 1 per cent higher by early afternoon in London, putting its year-to-date rise at more than 15 per cent. US benchmark West Texas Intermediate was up a similar amount on the day above $57 a barrel.

Since collapsing in March and April last year as lockdowns and travel bans slashed energy demand, oil prices have been on a steady path to recovery. They have been helped by supply curbs from the Opec+ group of oil-producing countries, led by Saudi Arabia, and signs of falling output elsewhere as energy companies have curbed spending.

While oil demand remains depressed by the economic fallout from the pandemic and extended restrictions on travel — with jet fuel particularly hard hit — Saudi Arabia’s decision in January to remove an extra 1m barrel a day from its supply, beyond its Opec+ obligations, has further tightened the market.

But traders and analysts have cautioned that oil’s rally may be becoming overextended, caught up in a rush towards riskier assets in anticipation of a US $1.9tn stimulus plan being hammered out in Washington.

Line chart of Brent crude ($ per barrel) showing oil prices have surged as the market 'crawls back to normality'

“What makes this unrelenting uptrend all the more striking is that it comes against a backdrop of lockdown extensions and reduced oil demand,” said Stephen Brennock at PVM, an oil brokerage.

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“The oil market is crawling back to normality but there is an excessive degree of bullish exuberance floating around.”

In recent weeks, hedge funds have increased their bets on rising prices through futures and options contracts, according to exchange and regulatory data.

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Wall Street banks including Goldman Sachs and JPMorgan Chase have told clients they believe prices could push much higher as the rollout of Covid-19 vaccines and policymakers’ fiscal stimulus packages provide a double boost to demand. Some argue that this, combined with under-investment in the sector, could lead to a supply gap in the next few years.

But such assumptions could lay the groundwork for a swift correction should demand weaken further, with many developed-world countries still under restrictions designed to curb the spread of coronavirus and its new variants.

“Chinese oil use returned to pre-crisis levels already some months ago, and most other emerging markets in both Asia and South America have followed suit more recently,” said Norbert Rücker at Swiss private bank Julius Baer.

“[But] Europe and North America trail behind due to subdued driving and air travel activity, which drags world oil use still below the levels seen a year ago.” 



www.ft.com

Tags: cutshitslockdownsoiloutweighsupplytimeyear
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