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A weakening dollar, tighter supply and stimulus speculation help Brent to a winning streak
Thursday 11 Feb 2021 Author: Tom Sieber

The oil price is making a big comeback. On 9 February the Brent crude benchmark marked its seventh straight session of gains – its best winning streak since January 2019 – as it returned to pre-pandemic levels above $60 per barrel.

Investment bank Goldman Sachs, one of the first to pitch $100 per barrel before that level was reached in the late noughties, believes Brent will hit $65 by the middle of the year, bringing forward an earlier forecast by six months.

While there are several interlinking factors behind the rise in the oil price, there are reasons to think the momentum may not be maintained given the difficult demand picture.

On the supply side there are some signs that the broad extension to the output curbs introduced by OPEC and affiliates like Russia are having some impact. Furthermore, the latest weekly data showed US inventories of oil fell to 475.7 million barrels, the lowest level since March 2020.

However, there are reasons not to get carried away on supply as Bank of America recently commented: ‘While we see a demand recovery on the horizon, we expect OPEC+ spare capacity to limit the upside for crude prices.’

Russia is ramping up production while Saudi Arabia effectively takes the hit by keeping to quotas. That situation may not last for too long; after all, it is less than a year since the two countries started an ill-timed price war over crude.

Another factor in oil’s recent price rise is the progress of a $1.9 trillion Covid relief package in the US. This is stoking inflation expectations which is supportive of real assets like oil and adding to the recent depreciation of the dollar. The latter is typically supportive for oil prices and other commodities which are dollar-denominated.

The gradual reopening of the economy should help drive demand for oil as more normalised levels of travel and other economic activity potentially resumes.

However, the patchy nature of a rebound in air travel, with countries looking to limit the spread of new Covid variants as they roll out vaccines, is likely to constrain demand for jet fuel for some time to come.

For its part the US Energy Information Administration recently said it will take until 2029 for US energy demand to reach 2019 levels.

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