Oil prices are largely keeping their ground today but, looking at the bigger picture, Brent recovered much of this week’s losses and climbed back to just below $70, a level that is beyond healthy in the current market.
Most ‘hard’ fundamentals are already priced in and today prices are not earning further due to usual risk-aversion before the weekend in absence of other strong news and as oil supply is getting tighter.
Usually Fridays are the time of the week when oil even trims some price fat but today traders seem to believe that a price level of just under $70 is want the market conditions justify.
The reason prices are keeping such high levels is the tight supply environment that OPEC and its allies have created by deciding to not increase production from April.
In fact, while demand is about to tick up, not increasing oil output creates a strained environment that will force countries that have stockpiles of crude to actually use it.
The tight supply has started being visible in the actual market as Saudi Arabia is cutting down on the amount it will send to Chinese and Japanese refiners from April, who in turn will have to use some stocked oil for their operations.
Overall, we are bullish on oil demand continuing its upward trajectory in tandem with vaccine programs and the resumption of economic activities.
In our latest Covid-19 research, we see the possibility of reaching peak daily vaccination in July 2021 with around 30 million doses being administered per day globally.
Western Europe is projected to reach a 50% vaccination threshold by June 2021, and then North America shortly after by July 2021, with all other regions expected to hit the threshold in the last months of 2021, or the very beginning of 2022, as is the case with the Middle East.
The big upward oil demand momentum is not anticipated to take off until May 2021, when vaccine penetration rates gain momentum. Until then, there are short-term risks, especially in the aviation sector.
Meanwhile, looking at the US, as of now we have identified 237 started frac jobs, exclusively based on our analysis of satellite data.
Of these, as many as 49% are in the Permian, while 17% have been detected in the Niobrara. While it is too premature to speculate on fracking activity for March, we can already see that they are substantially higher than in February.
The beginning of a rapid fracking activity recovery from the disruption caused by the severe winter freeze in the Permian Basin is already evident. We are also seeing signs of recovery in other oil basins, although they are less pronounced.
It is important to look at how quickly US output grows so the country’s rig count and frac job number are data that the market is following to project the coming US supply. OPEC+ will also be monitoring US activity when it forms future policy, a risk of increased shale momentum was identified in its previous meeting.