Oil prices have jumped again as cold weather causes US supply growth slowdown, in addition to an overall bullish market sentiment.
Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the price rises:
"Another psychological price ceiling was broken today and WTI also surfaced over US$60, helped by weather-related production revisions, tensions in the Middle East and an overall positive sentiment over a balanced market.
Whether or not the rise is justified is open to interpretation but prices have risen uncomfortably much over a short period of time and there are real concerns – and curiosity – over their ability to hold the gains going forward.
Last week the market slowed down the February rally but now it looks like it was just a pit stop to refuel and head back to the race.
Worries over tensions in the Middle East, namely between Saudi Arabia and Yemen, always raise concern for local supply.
In the US the Biden administration is moving closer and closer to getting the US$1.9 trillion stimulus package approved and despite the delays there is trader confidence that we will soon see it flooding the markets with cash.
Else, there are government body voices from oil-producing countries pointing to a balanced oil market at the moment, creating a positive sentiment and relieving fears that demand is still creating a surplus.
In our view, the factor that affects prices today the most, however, is weather-related and it has to do with developments in the US.
While US onshore fracking activity has held at maintenance levels since the fourth quarter of 2020, some weather-related challenges have delayed ongoing operations, flowback activity and even impacted base production.
We are getting reports that the unusually low temperatures in Texas right now are causing some work to be halted. The impact is expected to be larger for fracking and flowback activities than for drilling.
We are also getting reports of power outages across the Permian, which are expected to continue over the weekend if the current weather system persists. This may result in intermittent production shut-ins, with a moderate impact on Permian oil production expected in February.
With that, the shape of the supply curve for the first half of the year becomes more backloaded and it might take more time for oil production from the US lower 48 states to move back to the north of 9 million bpd.
Naturally, when the US oil supply outlook gets revised lower, WTI prices enjoy a larger benefit than Brent and that’s exactly what’s happening today.
Of course the total price system gets a boost when supply is revised down, but finally, WTI has its moment to shine and close the gap after Brent’s rallies.
Coming indications on production activity in the US will determine how long this rally will last but this Monday is definitely significant for oil prices, as WTI emerged from a sub-60-dollar environment and the confidence that event is bringing in itself is immense.
Traders could have build up the prices a bit extra today due to that psychological level.
Nevertheless, caution is advised. Even if US production is revised lower, the price levels we are seeing lately are treading on unstable grounds. Time will tell if they are sustainable but a price correction soon won’t surprise anyone. We are still in the middle of a fully blown pandemic after all."
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