Oil prices recover from Covid-19 collapse

Major oil producers have squeezed output significantly over the past year

(Image credit: © OMAR TORRES/AFP via Getty Images)

published 11 February 2021

Oil prices have returned to pre-pandemic levels. The price of the world’s favourite commodity slumped last spring as major economies locked down. US oil futures briefly turned negative as traders found themselves stuck with fuel that nobody wanted. Yet Brent crude prices have rocketed by 180% since their nadir to trade above $60 a barrel this week. Before Covid-19 took hold the contract was trading around $59 a barrel.

Joe Biden’s announcement that he will not lift sanctions on Iran (see page 10) provided the “immediate catalyst” for the latest price bump, says Julia Horowitz on CNN. But the broader rally is all about the vaccines and hopes that big economies are well on the way to returning to normal. On the supply side, oil exporters’ cartel Opec and ally Russia have continued to limit output. Saudi Arabia’s announcement that it will cut output by a further one million barrels per day (mbpd) from this month has provided an extra fillip. Opec and its allies have “held back a cumulative 2.1 billion barrels of oil” since last April, says Justin Harper for the BBC. They didn’t have much choice: air passenger traffic is still down by 70% on last year.

US producers have done their bit too, says Joe Wallace in The Wall Street Journal. The country is “pumping 17% less crude” than it was on the eve of the pandemic as lower prices have forced the closure of less economical wells and halted new exploration.

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The medium-term outlook for oil is positive, but expect setbacks along the way. This rally is “overextended”, says David Sheppard in the Financial Times. Prices may be back at pre-pandemic levels, but demand, still six mbpd below 2019 levels, is not. There is “excessive... bullish exuberance” in oil markets, says Stephen Brennock of brokerage PVM. Traders are high on the promise of stimulus.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.