Oil prices have rallied back to almost pre-pandemic levels. since the beginning of the year, crude oil has strongly performed, making a rise of 19.5%.

main key drivers of the crude oil rally were optimism; driven by large stimulus packages around the globe and the rollout of vaccination, and oil short supply.

FUNDAMENTAL OVERVIEW

OIL DRILLING INDUSTRY

U.S oil rig count starts recovering a bit as oil prices significantly increased.

U.S Baker Hughes oil rig count has made its bottom in august 2020 and started since then making its pullback to the upside.

However, active oil rigs haven’t risen much and still at low levels signaling a slower pace of supply increase.

Moreover, more investment plans to increase production are out of the table among most oil companies. They are mainly pushed by two reasons for that kind of decision:

The first is to reduce capex in order to preserve earnings and future good dividends for shareholders, like what ExxonMobil has announced earlier this week.

The second is looking for opportunities through investing in green energy and looking for other substitutes of oil ( Bp & shell).

EIA CRUDE INVENTORIES

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U.S crude oil inventories have declined sharply since December 2020, indicating a continuous demand on oil.

As shown in the chart above, there is a strong inverse correlation between oil price and inventories. A further decline in the latter may push oil prices toward further highs.

OPEC OUTLOOK

A final element that we should stand on when analyzing oil is the OPEC monthly report.

In its last report, the total oil demand minus non-OPEC supply equation that measures what has been left for the OPEC cartel to produce has risen to 26,79 Mbpd in the first quarter of 2021 form 26.53 Mbpd in Q4 2020 which is a 7.4 % necessary increase in OPEC oil supply to meet the demand breakeven.

During the fourth quarter of 2020, according to January OPEC monthly report, the oil market was facing a short supply of 1.58 Mbpd which was the principle factor in driving oil prices higher.  

Based on OPEC data and our calculations we still anticipate oil short supply in the first half of 2021 before oil producers start rethinking their production strategy.

CRUDE OIL PRICE ACTION

Our forecast in the short term is A target of 60$ to 61$ in the WTI futures. This target basically depends on a continuous decline in U.S oil inventories and a more optimistic upcoming OPEC oil report the next week.

Technically speaking, we noticed a decline in oil price momentum for consecutive five days, as measured by the one-week average historical % change, which may lead to some technical price retracement to the downside before resuming the upward trend.

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