05 JAN – Crude oil above $50 signals turbulence

After remaining soft for the better part of 2020 because of the Covid-19 pandemic, crude oil prices have began to inch up and are hovering around $50 per barrel mark.However, experts are of the view that the commodity will be volatile this year and its movement will be determined by the vaccine rollout and whether the new strain of coronavirus will spread further.

Opec is meeting to decide (on the production levels for February) whether it can lift output as rising infections affect recovery in global energy demand.Reports say while countries such as Saudi Arabia have been cautious on raising output, others like Russia have said the producers could add another 500,000 barrels a day next month.

According to the ‘Crude Oil Insight Report’ from Motilal Oswal, prices of the commodity advanced higher in the past one month and prices finally hit $50 per barrel as traders expect demand to pick up next year.

“A falling dollar on the back of a global economic recovery and continued stimulus spending in the US as well as other major economies, is creating a positive feedback loop for oil prices, akin to what occurred in the 1970s and 2000s when oil reached historical highs. All these events suggest a turbulent and disorderly global oil markets over the last 12 months with long-lasting implications as markets begin to digest a new form of normality towards a post-virus equilibrium,’’ the report added.

The West Texas Intermediate crude oil was trading 2.02 per cent higher at $49.50 per barrel, while Brent crude also gained 2.26 per cent at $52.97 per barrel in New York on Monday.Crude oil prices have been rallying from November on positive news from the Pfizer vaccine and this had led to Brent crude rising from $42 per barrel to $52 per barrel.

The Motilal Oswal report said crude demand stood close to 100m barrels per day in 2019, but the pandemic wiped out 10 per cent of the market as transport and industry took a hit from lockdown measures implemented globally to contain the spread of the pandemic. Demand for crude is likely to have closed 2020 at 89 million barrels per day, a historic fall of 9 million barrels per day compared to 2019. However, while oil demand from Asian countries particularly India and China remain strong, that from Europe and the US  disappoint.

“Fundamentals do not suggest seeing a second significant jump in oil prices until vaccination rate begins to rise. Brent and WTI crude are expected to climb `marginally’ in the first half of 2021, and then move up more quickly in the second half of the year. The understandable euphoria around the start of the vaccination programme partially explains higher oil prices, but it will be several months before the advent of mass inoculation to economically active people and relevant impact on oil demand’’, the report observed.

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