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Abu Dhabi, UAEFriday 5 March 2021

Oil extends its rally as supplies remain tight

Prices are back close to pre-pandemic levels

The sun sets behind Fawley oil refinery in Southampton, United Kingdom. The tightness in the markets comes amid higher demand in Asia and a continued restriction of supply from the Opec+ group of producers.Getty Images
The sun sets behind Fawley oil refinery in Southampton, United Kingdom. The tightness in the markets comes amid higher demand in Asia and a continued restriction of supply from the Opec+ group of producers.Getty Images

Brent, the international crude benchmark, traded above $61 per barrel, while US futures moved closer to the $60 mark as oil gained from tighter global supplies.

Brent surged as high as $61.2 per barrel during early trading hours before tapering slightly to $60.37 per barrel at 3.22pm UAE time on Tuesday. West Texas Intermediate, which tracks US crude rallied as high as $58.61 per barrel before softening its gains, down 0.64 per cent at $57.6 per barrel.

The tightness in the markets comes amid higher demand in Asia and continued supply restrictions from the Opec+ group of producers.

"With US equity markets ending last week at record highs, positive momentum in oil markets also continued, pushing ICE Brent above $59 per barrel for the first time since last February, whilst Nymex WTI put on around $0.60 per barrel d-o-d to narrow the spread between the two benchmarks slightly," JBC Energy said in a note on Tuesday.

Support for oil prices has come from the 23-member group of producers led by Saudi Arabia and Russia. The Opec+ group convened earlier this month and left its current pact unchanged, save for exacting pledges on compensatory cuts from Kazakhstan and Iraq.

The bloc will meet in March to review plans for the remainder of the year. Current production curbs stand at 7.2 million barrels per day, about 7 per cent of global supply, in addition to a voluntary reduction of 1m bpd from Saudi Arabia.

However, with prices at current levels seen as conducive to the shale producers coming back online, Opec+ cohesiveness is likely to be tested.

Countries such as Iraq, which have strained finances, will look to export more. Opec+ will likely consider a gradual increase in production in line with expected demand. The group deferred an earlier planned increase in production of 2m bpd from the beginning of the year to drain oil inventories further.

Oil prices have gained nearly 12 per cent over the last month due to optimism over the rollout of vaccination programmes in several parts of the world.

Commodities such as crude have benefitted from a super-cycle aided by a weak dollar and a promise of economic recovery in several parts of the world.

Demand recovery from Asia, driven by China has also helped prices rally.

Increased purchases of oil from China "due to low freight costs" as well as prospects of improved global demand due to inoculation drives are behind the US crude benchmark's rally past $58 per barrel, according to Ipek Ozkardeskaya, senior analyst at Swissquote.

Prices are also supported by renewed optimism over the US economy, which is likely to see an infusion of $1.9 trillion of stimulus. The world's largest economy is also the hardest hit from the Covid-19 pandemic. The US accounts for more than a quarter of all infections globally and has registered 476,405 deaths as of Tuesday, according to Worldometer, which tracks the pandemic.

A fresh stimulus package would also translate into greater demand for transportation fuels leading to greater gains for the oil markets, according to JBC Energy.

Updated: February 9, 2021 04:15 PM

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