Although oil demand is still far below pre-pandemic levels, prices have exceeded them. Both international benchmarks — Brent and West Texas Intermediate (WTI) — have unexpectedly breached the $60 mark and have fully recovered to pre-pandemic levels. Managing to breach the $60 barrier leads the market to finally resurface after the long struggle in 2020, but how sustainable is this price surge?

Oil prices have risen 15 percent in only one month, which so far seems to be the new norm for 2021. Technical indicators signaled that prices may have climbed too far too fast, and made the longest sustained period of gains since December 2018, with January 2019 pushed higher by COVID-19 vaccinations and tighter supplies. The upward price momentum is also driven by the financial market and speculator confidence.

OPEC+ is holding back more than 8 million barrels per day (bpd) in supplies that will progressively undershoot demand later in 2021.

Faisal Faeq

Should the Organization of the Petroleum Exporting Countries (OPEC) stop this momentum? OPEC+ is holding back more than 8 million barrels per day (bpd) in supplies that will progressively undershoot demand later in 2021, especially after more people get vaccinated and start going away on trips and working in offices. Higher oil prices are meanwhile encouraging US producers to increase oil output. The US oil rig count rose recently to its highest since May 2020.

Brent and WTI are trading higher than their best forecast averages of the year, with some hedge fund managers expecting prices to go much higher before the end of 2021.

The backwardation curve is giving signs that the global oil market is tightening, but demand is not improving, even with the huge draws from global oil inventories. The International Energy Agency reported that December stocks fell for the fifth consecutive month to 138.3 million barrels above the five-year average.

Is it time for OPEC+ producers, when they meet next month, to stop this upward price momentum? If a hefty price correction is needed, the only tool OPEC+ has today is to raise production. However, if it does increase production then, it could create an immediate downward price correction that would be more intense, which the fragile global economy cannot handle.

  • Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq