Oil prices spike due to OPEC+ expectations, China demand

Oil prices spike due to OPEC+ expectations, China demand

Oil prices rose on Monday on expectations that OPEC+ may keep output stable in February. Also, on a demand uptick coming from China.

The price of OPEC basket of 13 crudes stood at $50.24 a barrel on Thursday, Dec. 31, 2020, compared with 50.22 the previous day, according to OPEC Secretariat calculations.

Oil prices started the week positively on expectations that OPEC+ will keep output levels unchanged in February. As Chinese oil demand is recording a weather-related uptick, said Rystad Energy’s Head of Oil Markets Bjornar Tonhaugen.

When OPEC+ decided last month to step in and help the oil market again; limiting its planned output boost to just 500,000 barrels for January, prices grew on the bullish news as the group addressed demand concerns. OPEC’s decision left room for uncertainty though; as it left the output of following months open to discussion, added Tonhaugen.

Russia to support increase

“Russia has reasons to support a 500,000 bpd maximum increase and so likely do some others including the UAE. While Saudi Arabia seems less eager to taper given the risk to from spiraling COVID-19 cases to demand,” said Tonhaugen.

Oil prices are rising Monday as most participants in Sunday’s OPEC+ JTC meeting to be against an output increase from February; creating expectations among traders that no more additional oil will flood the market amid the current weak demand, Tonhaugen said.

Under the current output terms, surpluses are expected from February till April, before demand recovers from May onwards; so a possible OPEC+ decision to not increase production will keep balances at a manageable level, he added.

Supporting overall oil demand

“Crude is also currently receiving support from a weaker US dollar and a positive sentiment over risk assets. A cold-snap in China is increasing diesel demand as a back-up source for power generation; which is also supporting overall oil demand,” said Tonhaugen.

On the downside, traders make sure the price gains do not go over the edge; as COVID-19 cases are continuing to escalate in parts of the world, even in Asia, at the heart of the demand recovery.

“Thailand and Japan, where a state of emergency is being mulled, will be on traders concern radars,” Tonhaugen said.

Vaccine rollouts are ongoing across the globe, but traders know it will take time before anything close to herd immunity is reached; hence the bears look set to come back and haunt the bulls before long.

Overall, a lot will depend on the OPEC+ meeting on Monday. If the decision is to rise output from February, prices are to take a hit.

“At the moment though, expectations are for the opposite, with stable output lightly priced in. A confirmation that the group’s production will not rise will definitely strengthen the market sentiment and assist prices on their ascent,” he said.