- WTI has dropped back below $60.00 on Tuesday from Monday’s highs of close to $61.00.
- But crude oil markets remain broadly underpinned, with weather-related supply issues in the US underpinning the price action.
Front-month futures contracts for the American benchmark for sweet light crude oil, West Texas Intermediary (or WTI), has slipped back below the $60.00 level this Tuesday, a level it surpassed for the first time since the start of January 2020 on Monday, as US flow returns to the market. Note that US markets had been closed on Monday due to the Presidents’ Day public holiday. Amid Monday’s thin market conditions, WTI hit highs close to the $61.00 level. While most of these gains have been eroded with WTI back below $60.00, it is still a little higher on the week and off session lows in the $59.30s.
Driving the day
The main talking point in energy markets this week has been the disruption to US productive capacity due to adverse weather conditions (a deep freeze) in the Gulf of Mexico region. The blizzard has reportedly reduced daily US crude oil production by 2M barrels per day. Whilst supply is likely to return to normal within the coming days as weather conditions in the region improve, the loss of output only serves to further tighten global crude oil markets which are already being squeezed by ongoing OPEC+ output cuts, as well as the Saudi’s 1M barrels per day voluntary output cut that is scheduled to last through March. Global inventories are thus likely to see larger than usual draws over the coming weeks, hence the upside that has been seen in crude oil markets so far this week.
Though crude oil prices have eased back a touch on Tuesday from Monday’s fresh 13-month high levels, the complex remains underpinned by a positive demand side outlook; virus infection rates are dropping across key developed markets, with the worst of the winter Covid-19 season seemingly now in the back rear-view mirror. Meanwhile, vaccination programmes continue to accelerate and markets continue to expect more fiscal stimulus from the US government, as well as ongoing support from major global central banks.
One factor that might be a concern for crude oil market participants might be how higher prices impact OPEC+; will producers be tempted to raise output to make the most of higher prices? Will compliance to the deal suffer? OPEC+ commentary will be closely scrutinised over the coming days/weeks for further clues.
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