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Brent and WTI crudes rallied sharply to reflect the OPEC+ group of producers’ decision to remove an additional 1.425 million bpd from inventory during February and March. According to strategists at TD Securities, Saudi cuts and OPEC+ flexibility in response to weak demand may well see WTI prices cement themselves a few dollars north of $50/bbl and Brent trend above $55/bbl in the not too distant future.

Key quotes

“Prices rallied sharply as the OPEC+ group of producers will see large inventory draws during February and March. This is a direct result of the OPEC+ group’s decision to raise production by 425k bpd less than previously expected and Saudi Arabia’s vow to implement a unilateral 1m bpd of voluntary cuts. Overall, energy markets are interpreting OPEC+’s decision as a ‘Gift for the New Year’ as the decision is a preemptive production adjustment to fears of demand destruction in the aftermath of COVID-19 lockdowns.”

“As a result of Saudi cuts and a general willingness to be flexible in response to weak demand, we may well see WTI prices cement themselves well north of $50/bbl and Brent trend above $55/bbl in the near future. Notwithstanding, the market should not expect the rally to turn into a runaway train much above those levels, as higher prices may be seen as breathing life into US shale producers down the road, which are otherwise expected to see a lackluster production growth profile.” 

“US output growth won’t manage to offset the substantial inventory drawdowns expected as a result of this deal until prices rise meaningfully above breakevens. This suggests that geopolitical risks may remain the key downside risk for energy markets in 2021.”