A fall in US oil inventories lifted oil prices on Tuesday despite a warning from the International Energy Agency of a potential oversupply
Crude futures had softened as higher US 10-year bond yield and a stronger dollar weighed on the markets. A fresh Covid-19 outbreak in China, which had largely brought its infections under control and was on the path to economic recovery, also sparked concerns about the rebound in crude demand.
However, markets bounced back and Brent was up 1.33 per cent at $56.40 per barrel at 5.26pm UAE time. West Texas Intermediate, the US gauge, was up 1.15 per cent at $52.85 per barrel.
The benchmarks moved higher as US crude inventories fell by 3.1 million barrels in the week to December 11, according to the Energy Information Administration.
Oil prices have surged 10 per cent since the beginning of the year, buoyed by Saudi Arabia's unilateral decision to cut 1 million barrels per day in February and March. The surprise voluntary commitment from the world's largest exporter will deepen curbs by the 23-member Opec+ group, which has begun drawing back 7.2m bpd from the markets since the beginning of 2021.
The International Energy Agency, however, cautioned that current price levels are conducive to a resurgence in US shale, a sector battered by the Covid-19 pandemic.
Fatih Birol, the executive director of the IEA, told Bloomberg in a television interview that a "big chunk" of US shale could prove profitable at current prices.
Higher oil prices could bring back "some investment activity in the US", UBS said in its forecast for 2021 on Tuesday.
The Swiss bank sees a "moderate production response" in the second half of the year and a "stronger" one in 2022.
"Large US shale producers did reiterate restraint on production growth after oil prices moved above $50 per barrel last week," the report added.
The US shale industry has been decimated by the pandemic as record low prices, which saw WTI trade at sub-zero levels in April, led to bankruptcies in the sector.
However, the US benchmark has since climbed back to 11-month highs and has been trading above $50 per barrel since the beginning of 2021.
US production was as high as 12 million bpd at the beginning of 2020 and is now close to 11 million bpd. The industry is not expected to recover to historically high output levels anytime soon.
Saudi Arabia's commitment to deepen cuts is more of a "preemptive move", NBK said in a note on Tuesday. The Kuwaiti bank said the world's largest oil exporter based its assessment on deteriorating oil demand.
"While oil demand appears to have beaten expectations in December, the current quarter is looking weaker than expected, with many advanced and emerging economies facing a second or even a third round of lockdowns," NBK said.
While prices remain high, the global crude and petroleum overhang also remains "ample", particularly in distillates such as diesel and jet fuel, as mobility restrictions are tightened in Europe.