As extreme weather grips the American state of Texas which plunged into darkness amid rising demand for electricity, oil and gas prices rallied to the highest in more than a year. The rise in crude oil prices has been so steep that Brent has gained nearly 15 percent in a month. The US oilfield and refineries output have both showed massive decline, as more than a million barrels per day have been shaved off as ice cold temperatures wreak havoc in the USA.
For the first time in over two years, the oil prices are being moved by supply and demand dynamics by the USA, as the Opec Plus takes a backseat. Going by weather projections, things are expected to settle down in the coming week or so, and the recent highs may well be tested as the ground realities minus the unprecedented weather affected demand hike and supply disruptions, have not much changed from a month ago.
The Opec has recently reported increased production numbers from some of its smaller partners in Africa. Iran has also recently reported its highest oil output in months, and the overall medium-term demand projections are still on the lower side. The market expects oil demand to take longer than previously expected to recover to pre-Covid levels, despite a significant surge in demand from China. Once the US production is back in the mix to near full throttle, normalcy is expected to return to the oil market, which continues to be plagued by demand concerns in the longer run. That said, some market pundits have suggested caution to add a risk premium as the world may now rethink its strategy to slowdown the rather quick transition towards renewable electricity.
What has happened in Far East Asia and the USA recently is a timely reminder how the base load management of electricity may still continue to need fossil fuels for longer than was previously anticipated.
The vaccine is good news for hopes of demand revival but that could be met with an equally enthusiastic supply increase response from Opec Plus, which has so far demonstrated immense compliance in sticking to the production cuts. The cat and mouse game at the oil market is expected to go on, till there is more clarity on how the vaccination drives may or may not result in economic activities returning back to full swing in the west. Till then, high volatility could well be the flavor of the market.
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