Crude oil climbs to pre-pandemic levels on tightening supply and demand recovery hopes

Crude oil prices rise to pre-pandemic 11-month highs, gaining support from Saudi Arabia’s 1 million bpd supply cuts, together with the fall of the US dollar, the oil demand recovery bets, and the lower crude inventories.

The US-based WTI crude contract extended a recent rally towards $54 per barrel level on Wednesday morning, while the international Brent crude contract rose as high as $57.50 per barrel, prices not seen since February 2020 and before the start of the pandemic.

The rally in the crude oil contracts continued into the energy stocks and ETFs, offsetting the surging Covid-19 cases around the world. Energy names such as Exxon Mobil, Valero, Conoco, Phillips 66, and the leading energy ETF “USO” have gained more than 50% since the recent lows in October, with some of them recovering almost all the pandemic-led losses.

Saudi Arabia’s supply Cuts:

Energy investors increase their bullish bets on crude oil contracts, amid expectations that the supply cuts by OPEC members will continue into 2021.

Saudi Arabia which is the de-facto leader of the OPEC group, has surprised the energy market by unilaterally deciding to cut its crude output by an extra 1 million barrels per day for February and March. The Arab country decided to tighten its crude supplies until the end of Q1 2021, to prevent a glut in the global oil storages caused by the lower demand for petroleum products amid the resumed global lockdowns to curb the spread of the second Covid-19 wave.

Mass vaccinations increase the hopes for oil demand recovery:

Herd immunity would be an important price catalyst for the oil market. Investors have already started positioning their funds into energy stocks and ETFs, anticipating that a successful roll out of a vaccine around the world, would reduce the pandemic-led global demand losses for jet and gasoline fuels in 2021-2022.

Energy prices have also gained support from the prospects of a massive US fiscal stimulus that would recover the industrial activity and hence the demand for petroleum products.

The recent fall of the US dollar to 3-year lows makes the dollar-denominated crude oil products cheaper for buyers with foreign currencies.

Finally, oil prices received an extra boost on Tuesday night, after the API crude oil inventory report for the US dropped by 5.8 million barrels last week to around 484.5 million barrels, surpassing analyst’s expectations for a fall of 2.3 million barrels.