Oil prices have come under strong pressure last week as the number of new COVID-19 infections rose dramatically following a significant increase in the crude prices in the past few months on the back of bullish expectations with the roll out of coronavirus vaccine across the world.
Oil futures in New York tumbled 2.3 per cent on Friday as the dollar strengthened, and US consumer sentiment index came in lower than previously expected due to the resurgence in virus infections, which raised new concerns over an economic recovery. Oil prices last week hit an 11-month high above $57 a barrel this week, supported by OPEC+ supply restraint and a voluntary cut by Saudi Arabia.
Meanwhile, a number of cities in China, the largest importer of oil in the world, are reportedly bringing back lockdowns and other strict COVID-19 measures after the country on Friday reported the highest number of daily coronavirus cases in more than 10 months. Millions in lockdown has naturally lead to a decline in oil demand.
Moreover, the Organization of the Petroleum Exporting Countries (Opec) reported on Thursday an increase in US shale oil production due to the recent rally in the price, which means more oil is being pumped in the market, reducing the price. A significant rebound in shale could hamper efforts by Opec and its allies to support the market.
Despite the pullback in oil futures, vaccine breakthroughs and Saudi Arabia’s decision to trim a million barrels per day from production in February and March are expected to support prices. The oil market is still strong and likely to remain in that position as analysts remain confident that investors’ appetite for commodities such as oil appears to be increasing rapidly following the recent price rally.
However, opposing factors- China’s declining demand, US sluggish economic data and the rise in COVID-19 cases and renewed lockdowns in Asia and Europe, will certainly lead to another pullback in prices unless Opec and non- Opec members work together to limit the supply to support the prices. Nobody is interested in seeing a 2020 like deterioration in the price.
Opec, with the support of OPEC+, through cooperation, succeeded in lifting the prices in 2020 following their fall to their lowest in 17 years- in April, Brent oil prices traded at less than $27 per barrel, while West Texas Intermediate crude (WTI) was at $23 per barrel. The market is currently in need of another round of agreed formula to prevent a steep decline in prices as the COVID-19 seems to put a lid on global demand in the first quarter of the year.