More upside to come for the oil price

published 14 January 2021

Brent crude reached $56.75 a barrel this week, its highest level since last February. Saudi Arabia’s announcement last week that it will cut output by one million barrels per day (mbpd) from February gave crude its best week in four months; Brent is already up by more than 8% since the start of the year.

Saudi Arabia and Russia, the two-leading producers in the Opec+ cartel, have spent much of the past year squabbling about how to respond to the Covid-19 crisis, says Oilprice.com. The Saudis have consistently favoured supply cuts in order to keep prices high, while the Russians argue that strategy will just hand profits over to US shale producers (who operate independently of Opec+). Saudi Arabia’s unilateral cut ends the group’s focus on sharing output curbs equally, with Russia and Kazakhstan set to raise output by 75,000bpd from next month.

Oil markets had a bout of the “hebee-jeebies” earlier this week as parts of China moved back into lockdown, says Stephen Innes of Axi. A durable drop in Chinese activity is a key risk to oil markets. Nevertheless, the scale of the Saudi output cuts provides a decent cushion against bad news. US political developments are also keeping traders optimistic: Democrat control of the Senate means more regulation of US shale producers is likely, which could put a lid on US production. “Risks remain”, but there could be more upside to come.