MILAN – – After a rocky 12 months, oil prices – which got crushed when COVID-19 slashed demand for energy around the world – are roaring back.
What’s happening: Brent crude futures, the global benchmark, have breached $50 per barrel, their highest level since January 2020.
The immediate catalyst appeared to be weekend remarks from President Joe Bide that the United States will not lift sanctions on Iran to get the country back to the negotiating table. But oil prices have been on the upswing for months thanks to optimism that coronavirus vaccines will unleash demand while producers avoid flooding the market with supply.
‘With COVID-19 cases now declining in certain regions, including the U.S. and the U.K, there will be a glimmer of hope that the worst is now behind us, particularly as the rolling out of vaccinations picks up’, IMG commodities strategies Warren Patterson and Wenyu Yao said in a recent note to clients.
There are also meaningful of demand recovery in high – growth economies such as China, India and Brazil, UBS oil analyst Giovanni Staunovo told me.
The demand trajectory is definitely ‘pointing upwards’, he said.
Meanwhile, producers are working hard to keep supply in check so there can continue to be a meaningful drawdown in inventories, which filled up last year.
The Organization of the Petroleum Exporting Countries and allies agreed to keep production broadly steady in February and March, while Saudi Arabia said it would voluntarily cut its production by 1 million barrels per day from January’s levels.
Producers in the United States, for their part, are expected to need longer to get back up to speed.
‘Investment activity has been relatively muted, and it will still take time to see a bigger impact’, Staunovo said.
Taken together, this is good news for prices. The trend has supported the shares of oil companies like Exxon and Chevron since November.
That said: Such stocks remain well below where they were before the pandemic hit, underscoring the long road ahead.
If investors become worried that asset price have moved too high, too fast, both stocks and oil prices could be put under pressure. and the demand forecast remains murky, especially as new coronavirus variants complicated back – to – normal timelines.
AstraZeneca said over the weekend that its COVID-19 vaccine showed limited protection against the variant first identified in South Africa. It’s working to develop a new version that it could – deploy this fall.