After a super successful week opening, when WTI refreshed its October 2018 highs and reached $68 per barrel, market sentiment changed. In just a few days, the price of one barrel of oil sank by more than 7% and found itself below $64 again. The main question is what will happen to oil quotes next?
Prices rose on Monday in response to airstrikes against Yemeni capital Sana'a by the Saudi-led coalition in Yemen. Riyadh's military aggression was retaliation for the Houthi rebels' launching of several attack drones on Saudi oil facilities. Nevertheless, despite the growing geopolitical tensions in the Middle East, Brent's bull rally never continued, as Saudi Arabian officials denied information that the conflict with Yemen, as well as the latter's attacks on a number of their oil facilities, led to disruptions in oil production.
Despite the subsequent corrective pullback, the general market mood is still positive, which indicates that the price has all chances to return to its growth trajectory. Market participants keep discussing the results of the OPEC + meeting held last week. Let us recall that OPEC and its allies decided to keep the current output cuts unchanged until the next meeting, scheduled for April 7. An exception was made only for Russia and Kazakhstan, which were allowed to increase their production by 130 thousand and 20 thousand barrels a day, respectively. Saudi Arabia decided to extend its voluntary 1 million barrels per day cut into April. Thus, instead of the expected increase in oil production by 1.5 million barrels, the actual increase turned out to be 10 times less and amounted to only 150 thousand barrels a day.
Since the oil market continues to exist in conditions of limited supply, a faster pace of global economic recovery may cause a shortage of raw materials. The likelihood of this scenario was the reason why the price surged to its multi-year high last week. It should be noted, that it’s not only optimists who believe in a gradual recovery of global economic activity. According to the March OECD report, global GDP growth in 2021 could reach 5.6% which beats the previous estimate of 1.4%.
In addition to the improving global economic outlook, the easing of lockdown rules and restrictions, massive vaccination campaigns, and increased demand for transport fuels will also contribute to growth in oil prices. According to the US Transportation Security Administration, an average of 1.3 million air passengers pass through TSA checkpoints daily, which is currently the highest traffic since the beginning of the pandemic. Considering the above said, we recommend holding long positions in WTI crude oil with a target at $75 per barrel.