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Have oil prices stabilised?

Team Veye | 11 Jan 2021

Have oil prices stabilised?

A decision, last week, by OPEC and allied countries to cut crude production through March resulted in a boost to the stablising oil prices.

After Russia pushed to increase output, worried about US shale capitalizing on the group's cuts, Saudi Arabia announced its decision to voluntarily reduce its production by 1 million barrels per day (BPD) in February and March.

US crude oil production had fallen 2 million barrels per day in the last year as low prices and demand forced shale producers to cut their losses.

In April 2020 the oil prices had plunged to an unbelievable low in recent times. After rebounding from April lows, these more or less had stabilised by October. The recovery in prices was mainly due to a sharp fall in global production.

The new Covid-19 strain, which is possibly already in the U.S., and some European countries, is raising the risk of more stay-at-home measures that would sap energy demand. The UK is considering putting more people under a severe lockdown to halt its spread.

With this, demand in the transport sector will likely take a hit. Further, with recent flight bans from the UK, jet fuel demand will continue to be under pressure.

Transport accounts for two thirds of oil consumption. Of the three main transport fuels, jet fuels have been the most affected during a pandemic due to the drastic reduction in air travel.

The pandemic has shifted people’s behaviours which can have a lasting impact on oil consumption. Curtailed travel for business in favour of remote meetings and switching to work from home may reduce its demand.

While all these factors will certainly have an impact, the supply restraint combined with easing restrictions amid the optimism on availability of vaccine can see a further recovery.

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