Oil prices: Investors confidence returns as supply tightens

Oil prices start the London trading session bullish with investors regaining some risk appetite. However, they await clues from the U.S. Federal Reserve chairman on potential interest rate rises and some oil producers continued to struggle to beef up output.

The global benchmark, the Brent crude futures gained is up 0.62% currently trading $81.37 a barrel, after dropping 1% on Monday. The United States benchmark, the West Texas Intermediate (WTI) crude futures is up 0.73%, currently trading $78.80 a barrel, after falling 0.8% on Monday.

The measure of the strength of the U.S. dollar, the dollar index (DXY), is currently down 0.11%, currently trading 95.88 basis points. The bearishness seen in the DXY is also a contributing factor to the bullish momentum we are seeing in the London trading session today, as it makes oil cheaper for those holding other currencies.

A U.S. Senate committee holds hearings this week for Federal Reserve Chair Jerome Powell and vice-chair nominee Lael Brainard that could provide new details about the U.S. central bank’s plans to tighten monetary policy.

Recent oil price declines had been driven by worries about soaring cases of COVID-19 around the world potentially sapping fuel demand. Ravindra Rao, head of commodity research at Kotak Securities explained that “Rising virus cases are a cause of concern as restrictions impact mobility and thereby fuel demand. However, despite the sharp rise in cases, none of the major economies are looking at severe lockdowns.” He further added, “The virus situation, supply-related issues and trends in equity markets will be key factors affecting crude oil in the near term.”

Some analysts also believe that tight supply from the Organization of Petroleum Exporting Countries and its allies (OPEC+) not keeping up with demand was also supporting prices. ANZ Research commodity analysts explained this in a note. He stated, “The market could still benefit from tighter supplies and supply risk from Russia.” Political tension has mounted as Russia has amassed troops on the border of Ukraine.

Analysts pointed to OPEC+ supply additions running below their allowed increase under the OPEC+ pact, as some countries like Nigeria, are not producing their agreed volumes. OANDA analyst, Craig Erlam had this to say, “The fundamentals remain bullish for crude again – especially if OPEC continues to struggle to hit its quota as part of the 400,000 barrels per day monthly increases, as demand strengthens.”

Libya, which is exempt from OPEC supply curbs, has been hit by pipeline maintenance work and oil field disruptions. However, on Monday, production resumed at the El Feel oil field, where an armed group halted output last month.

Bottomline

The market is waiting on U.S. oil and product inventory data from the American Petroleum Institute (API) expected today, followed by data from the U.S. Energy Information Administration on Wednesday.

Six analysts polled by Reuters expect U.S. crude stockpiles fell by about 2 million barrels in the week to Jan. 7, which would mark a seventh straight week of declining crude inventories.