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Oil prices flat on European lockdowns, prices now more sustainable says Rystad Energy

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Oilfield Technology,

Oil prices started the week largely flat due to renewed lockdowns in Europe but, after last week’s painful correction, levels are now more sustainable.

Rystad Energy’s Oil Markets Analyst, Louise Dickson, has commented on today's developments:

"The swift and crushing oil price correction last week managed to shave off several dollars per barrel, but there could still be some more ground to cover.

There still may be some scores to settle this week before the Brent May contract roll-over on Friday. The squeeze we saw last week could very well persist a bit this week as traders potentially dump more futures contracts ahead of the ICE crude options expiration date.

There is still some residual pessimism in the market as Europe, instead of finally opening open, is seeing pockets of increased Covid-19 cases, forcing many European countries reinstate or extend lockdowns.

Vaccination campaigns haven’t been as fast as the market had hoped for and consequently this will have an effect on the oil demand recovery, which in turn hurts prices, cutting some growth potential.

If vaccination campaigns continue to face challenges going forward, 2021 may see up to 1 million barrels of oil demand per day not recovering this year, compared to a smooth recovery scenario. It is still early to judge and we have to see how quickly campaigns progress.

Despite oil starting the week at a slow speed, we don’t expect any dive of last week’s proportion, because oil has settled precisely at our 2Q21 price forecast, which is US$64 per barrel for Brent.

We have set our base case slightly above the marginal cost of supply for shale (breakeven prices for shale) and other marginal supply, because the market is for now artificially held in deficit by OPEC+.

We expect prices to stay close to their current mark temporarily as the market is waiting for news of US storage levels later this week and news from OPEC+ on how to proceed at next week’s meeting.

In the push towards the end of the price contract, some traders could see even more manoeuvrability for profit in a short position. Some optimistic buyers may interpret US$64 Brent as a buying opportunity, fuelled by very consistent OPEC+ supply restraint and hope for an eventual oil demand recovery spike.

A thorn to oil prices is the gradual ramp up in US shale activity. We have already identified 435 started frac jobs in the first two weeks of March, which implies that the final March total could exceed February’s by 50%.

The US horizontal oil rig count rose by 10 last week, to 283, marking a return to growth after having registered the first decrease of the year. This growth reflects bullishness in the oil market, in part driven by the OPEC+ decision not to increase production, coupled with signs of further recovery for the global economy.

The faster US oil production grows, the more pressure for oil prices, especially as oil demand is recovering a bit slower than what the market hoped for and priced in."

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