Oil prices set to gain momentum amid commodities 'supercycle'

Brent and WTI rounded off the first week of the year up almost 10%

CUSHING, OKLAHOMA - APRIL 23: An aerial drone view of a crude oil storage facility on April 23, 2020 in Cushing, Oklahoma. Crude oil prices plummeted into negative territory this week with the lack of demand partly due to travel restrictions currently in place across the United States due to the coronavirus (COVID-19) pandemic.   Tom Pennington/Getty Images/AFP

Oil prices are poised to surge near-term amid an optimistic outlook both for the US and global economies, a weak dollar and the rollout of vaccines in various parts of the world, setting the stage for a commodities supercycle.

Commodity prices, led by crude oil, have benefitted from consistent rallies over the last month as markets responded to various stimulus measures.

Brent, the international marker, closed at nearly $56 per barrel on Friday, registering a weekly gain of nearly 9.5 per cent. West Texas Intermediate settled at $52.24 per barrel. The benchmark surged 9.7 per cent last week.

The gains come as the producers' alliance Opec+ decided to roll over production cuts and Saudi Arabia, the world's largest crude exporter, agreed to slash production by 1 million barrels per day in February and March. The 23-member group will be cutting back 7.2m bpd in January and February.

Oil prices rallied prior to the Opec+ meeting as market speculators bet on a recovery in the global economy in 2021.

Data from Denmark’s Saxo Bank shows speculators hold net long positions on 24 major commodity futures of 2.5 million lots, which are worth $125 billion.

"The biggest bets are held in crude oil with the combined 614,000 lots long in WTI and Brent representing a nominal value of $30bn," said Ole Hansen, head of commodity strategy at the bank.

"The net long in crude oil and gold, the two biggest contracts in terms of exposure, remains well below their previous peaks which for crude oil was the 1.1 million lots reached in March 2018 and 292,000 lots in gold that was reached in September 2019," he said in a note on Sunday.

Meanwhile, the futures for Brent, under which two-thirds of the world's oil is traded, fell. Futures for March, April and May settled at $54.38, $54.30 and $54.13 per barrel on Friday.

Saxo expects the benchmark to climb as high as $60 per barrel on the back of higher fuel demand. However, the Danish bank remains sceptical about Brent's success in maintaining its current momentum, on the basis of oil market fundamentals.

Reflationary pressures buoyed by the outcome of the Georgia senate run-offs, which handed the control of the US Senate to the Democrats and could pave the way for additional stimulus, are also behind crude's recent surge.

"Ahead of the US presidential election, a Democratic 'blue wave' was judged by the market as the most reflationary scenario. That wave has come to shore, and we know that the rolling out Covid-19 vaccine turbo-charges the reflation trades," said Stephen Innes, chief global market strategist at Axi.

He expects the US economy to recover rapidly under the administration of President-elect Joe Biden, who is set to assume office on January 20. The Democratic president is looking to push for widespread vaccination in the world's largest economy, which has the highest number of Covid-19 cases.

The global tally of Covid-19 infections climbed above 90.1 million on Sunday, according to Worldometer, which tracks the pandemic.

The US accounts for more than a tenth of global cases. The US and UK have seen a rapid spread of the virus over the holiday season. Britain, which recorded a new, highly transmissible strain of Covid-19, has the highest deaths per capita in the world and has seen a total of 80,868 fatalities so far.