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Oil Update—January 2021

I am increasing my January West Texas Intermediate oil price forecast by $5 to $47.50 to $57.50 per barrel for February 2021.

Back in September of 2020, Prince Abdulaziz said that those who wanted to gamble on the direction of the oil market would be “ouching like hell.” Early this year when OPEC+ was expected to agree to a small increase in production, Saudi Arabia surprised the market by cutting output by a million barrels per day in February and March. That caught the oil market off guard and drove prices higher. Those that were short on oil learned what “ouching like hell” meant.

A Financial Times article “Saudis pledge to cut oil output despite Russian increases” (subscription required) captures the developments.

Saudi Arabia has pledged to slash an extra 1m barrels a day of oil output in February and March even as Russia moves to increase production, with the kingdom moving to keep the Opec+ group’s fragile alliance intact in the face of the coronavirus pandemic.

At the end of an extended two-day meeting, Saudi Arabia›s oil minister Prince Abdulaziz bin Salman announced the “voluntary” reduction after convincing most countries in the 23-member alliance to hold output steady, fearful of unleashing more barrels on to a crude market still roiled by travel restrictions and lockdowns.

Prince Abdulaziz said the unilateral cut was a “sovereign political decision” by his half brother Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler. It was taken with the purpose of “supporting our economy, the economies of our colleagues in Opec+ countries, to support the industry”, the Saudi oil minister said.

On the coronavirus front, we are witnessing more variants that appear to be capable of spreading more easily and that may or may not be more harmful. General comments in the media suggest that the variants can be treated with current vaccines, though the South African variant may be more resilient. While this development is worrisome, vaccination efforts around the globe are picking up steam and countries are imposing stricter measures to help combat the spread of the virus.

I expect that the pandemic will ease in the coming months as more people are vaccinated. As life slowly ebbs back toward normalcy over the next several months, oil prices will continue to firm. Some are calling for oil prices to hit much higher levels later this year, but before making such dramatic statements, I want to learn more how the combination of variants and the rollout of vaccinations plays out.

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