5 Reasons why Brent Oil price got higher than $60 a Barrel

What Drove Brent Oil Above $60 a Barrel?

Last week oil prices returned to the pre-pandemic levels.

What are the drivers behind this rally?

1. Oil inventories declined, both in the US and globally.
2. OPEC+ cut production and withheld millions of barrels of oil per day from the market.
3. Demand recovered putting slight pressure on supplies.
4. Joe Biden prepares $1.9-trillion stimulus program to boost American economic growth.

Oil prices are showing slight signs of improvement, and suddenly everyone is bullish on oil.

However, this recovery is perhaps the most fragile in the history of oil prices, and anything as small as a virus can wipe it out.

Will oil be able to withstand its ground?!

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The reasons and drivers behind the high oil prices

Oil prices rebounded strongly in the past two weeks until prices approached their pre-epidemic levels.

Prices recorded the longest winning streak in two years, after maintaining their strength for nine straight days.

Then oil declined on Thursday and Friday due to concerns about global demand.

However, oil rose again at the beginning of this week.

West Texas crude (WTI) returned to levels of $60 a barrel on Monday, and Brent crude continued to rise above $63 a barrel, after breaking $60 a barrel last week for the first time since January 2020.

So, what are the drivers behind this oil rally momentum?

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1. The drop in inventories, both in the US and globally.

In its latest update, the EIA stated that US crude oil inventories decreased by 994,000 barrels to 475.7 million barrels.

Sure, we don’t suffer from a supply shortage at this point, but the pressure on supplies is something worth noting.

The decrease in stocks means a decrease in the accumulation of oil and avoiding a glut in the market, with the withdrawal of supplies and an increase in demand.

The amount of crude oil and petroleum products stored around the world declined by about 5% since its peak in 2020, according to analysts at Morgan Stanley.

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2. Production cut by the OPEC+ and the withholding of millions of oil barrels per day.

In addition to extending the historic oil production cut agreement by OPEC and its allies by 9.7 million barrels per day, Saudi Arabia presented the oil market with a wonderful surprise at the beginning of 2021.

It voluntarily announced that it would reduce its production by an additional one million barrels per day in the first quarter of 2021, until next March, to support oil prices to recover from the consequences of the coronavirus pandemic.

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3. The recovery in demand, which puts slight pressure on supplies.

The boom in demand created a situation in the market known as “backwardation”, which means that the delivery price of a futures contract is lower than the current price or spot price of oil.

It occurs when there is a shortage of supply in the near term.

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4. The awaiting massive $1.9-trillion stimulus for the US economy.

President Joe Biden is trying with all his power to push Congress to pass the awaited relief package as quickly as possible, to help the US economy and families who are at risk of losing direct payments.

The approval of the stimulus means the recovery process moves faster, the return of the economy and factories to work, and the transport and traveling traffic is back.

That would translate into an increase in demand for oil, which will push prices higher.

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5. Vaccines Rollout.

Herd immunity is the biggest motive for hedge funds to support the bullish oil trend, according to Reuters.

Together with many banks, they believe that the United States – the largest consumer of oil in the world – will reach herd immunity by the middle of the year, which will coincide with the summer driving, travel, and vacation season.

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Conclusion

Finally, there are two reasons why analysts, some institutions, and major banks believe that oil will fall again at levels of $50 a barrel, as the US Energy Information Administration (EIA) expects, after the current bubble burst:

1. The current rally won’t continue without a correction. There won’t probably be a sharp decline, but this is how the markets work. Some correction is natural after a hot rally, so that the markets could digest prices to prevent inflation or bubbles.
2. Operators and rigs will start producing more oil in the second half of 2021, which will cause supplies to start piling up. As oil production exceeds demand, as it did in 2020, a slowdown in the withdrawal of global oil inventories will dampen prices.

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