It was expected since some time that oil prices were long overdue for increase particularly after the controlled production policies adopted by OPEC led by Saudi Arabia despite Russian rather lukewarm opposition. Moreover the spike in prices also occurred due to an attack on the world’s largest crude terminal situated in Saudi Arabia by drones and missiles though the desert kingdom maintained the output appeared to be unaffected. However, the market reacted sharply causing a surge in the prices that was ratcheted up to above $71 a barrel in Asian trading.
As was obvious, the futures in London jumped as much as 2.6% at the open after rising 4.9% last week. Oil surged to the highest in nearly two years after the OPEC+ alliance surprised traders with its decision to keep output unchanged, signaling a tighter crude market in the months ahead. Futures in New York climbed 4.2%, rising the most since Saudi Arabia last shocked markets with its January pledge to unilaterally cut output and global benchmark Brent also jumped. The OPEC+ producer alliance agreed during a virtual gathering to hold output steady in April. Saudi Arabia said it is in no hurry to bring back supply and will maintain its 1 million barrel-a-day voluntary production cut.
OPEC+ has helped drain a global glut that accumulated during the pandemic through its supply management, pushing crude futures up more than 30% so far this year. The strength is evident across many corners of the oil market, with key time-spreads widening further in a bullish backwardation structure — an indication of tightening supplies — and data from brokers showing rallies in key swap markets in the North Sea. Meanwhile, Brent options volume rose to the highest since March 2020, according to preliminary trade data compiled by Bloomberg.
The OPEC+ decision represents a victory for Saudi Arabia, which has advocated for production restraints to keep crude prices supported. However, higher prices could spur additional drilling activity by US shale explorers, with domestic oil rigs already at the highest since May 2020. Saudi Arabia appeared unfazed by that risk: Saudi Energy Minister Prince Abdulaziz bin Salman told reporters after the meeting that the US mantra of drill, baby, drill is gone forever. Market experts are of the opinion that the longer prices stay up, the greater the likelihood that it will eventually see a supply response from the US but, it is not going to be as immediate as it would have been in the past. OPEC+ had been debating whether to restore as much as 1.5 million barrels a day of output. As part of the agreement, Russia and Kazakhstan were granted exemptions. The group’s next meeting is scheduled for 1 April to discuss production levels for May.
Oil climbed last week after Saudi Arabia and OPEC+ made a surprise pledge to keep output steady in April, accelerating a rally this year that has seen prices surge more than 35%. The move prompted a raft of investment banks to raise their price forecasts with Goldman Sachs Group Inc. estimating global benchmark Brent will top $80 a barrel in the third quarter. Brent for May settlement gained 2.2% to $70.87 a barrel on the ICE Futures Europe after reaching $71.16 earlier, the highest since January 2020.
West Texas Intermediate for April delivery added 2.2% to $67.54 on the New York Mercantile Exchange after surging 3.5% in the previous session. Brent’s prompt time-spread at 68 cents a barrel in backwardation, a bullish market structure where the front-month contract trades higher than later shipments. It averaged about 58 cents last week. Bullish Chinese export data and the outlook for US stimulus also supported oil and other markets in Asia. US President Joe Biden is on the cusp of his first legislative win with the House has given $1.9 trillion COVID-19 relief plan, the second-biggest economic stimulus in American history.
The rally in crude prices that’s helped send fuel prices soaring is being compounded by refined product supply declines in the US after a deep freeze paralyzed much of the Gulf Coast refining sector late last month. Gasoline futures in New York climbed above $2 a gallon on Thursday before settling just under the key level.
One reason for the price surge was a recent and most serious attack against Saudi oil installations aimed at the key processing facility. That assault was claimed by the Houthi rebels, although Riyadh pointed the finger at Iran. It does seem that these attacks are picking up in frequency, so the market may need to price in some risk premium. The kingdom had reported that a storage tank at Ras Tanura in the country’s Gulf coast was attacked by a drone from the sea. The terminal is capable of exporting roughly 6.5 million barrels a day — nearly 7% of oil demand — and as such one of the world’s most protected installations.
The attacks follow a recent escalation of hostilities in the Middle East region after Yemen’s Houthi rebels launched a series of attacks on Saudi Arabia. The new US administration has also carried out airstrikes in Syria last month on sites it said were connected with Iran-backed groups. Meanwhile, tensions are gathering in the Middle East after Yemen’s Houthi rebels claimed attacks on Saudi targets. The rebels, who are backed by Iran, said they bombed an airbase in Saudi Arabia’s southwest with a drone and hit a Saudi Aramco crude facility in Jeddah. TW