Oil prices rally amid expectation of surge in demand

·3 min read
Oil drilling rig operation on the oil platform in oil and gas industry. Industrial concept.
Oil demand took a major hit last year. Photo: Getty Images

The price of brent crude oil crossed the $70 (£49) mark as lockdown restrictions ease around the world and investors expect demand for oil to surge in 2021.

This was after demand, along with oil prices, took a major hit during the pandemic.

In April last year, with almost every industry hit by the economic fallout of the coronavirus pandemic, an oversupply of oil had led to an unprecedented collapse in oil prices. 

Oil prices turned negative for the first time on record and Organisation of the Petroleum Exporting Countries and its allies agreed to major cuts in production.

More recently, prices had fallen due to surging coronavirus cases in Asia and underwhelming Chinese manufacturing data and amid the reopening of a major US fuel pipeline

But now, signs of a demand recovery in the US and Europe are fanning optimism.

Brent futures (BZ=F) were up 0.9% to $70.09 (£86.87) and crude futures (CL=F) were 0.8% higher to $66.79.

The FT noted that brent crude hit a level it had only briefly traded at since the beginning of the pandemic, adding that a it is "now comfortably back at its pre-pandemic level."

Read more: FTSE rises as UK unemployment rate falls amid signs of recovery

The rollout of vaccines in developed countries and an ease in restrictions is expected to lead to an increase in international travel. In the UK, Britons are now allowed to travel to 12 countries for leisure purposes.

With TSA [US Transportation Security Administration] screenings hitting 1.85m this week, and Memorial Day driving season around the corner, the strong bid in oil makes perfect sense," said Thomas Hayes, chairman at Great Hill Capital.

"The risks are an Iran deal with the US that removes sanctions and puts a meaningful amount of supply back online in the short term. OPEC has held steady in its commitment to control supply so far and the full commercial aviation recovery in the second half of 2021 should keep a decent bid under the market - even if we see new supply from Iran come online," he added.

Brent crude rose on Tuesday afternoon. Chart: Yahoo Finance UK
Brent crude rose on Tuesday afternoon. Chart: Yahoo Finance UK

"The gains in the oil price can be partially attributed to concerns that long-term oil supplies may not keep pace with rebounding consumption in the coming years, as international oil companies scale back investments in future production due to environmental concerns," according to an FT report.

Statista said global demand for crude oil in 2020 fell to 91 million barrels per day and is projected to increase to 96.5 million bpd in 2021. 

However, investors remain worried about the coronavirus variant first detected in India and about inflation fears as raw material prices surge.

"Traders are still very much conscious of the negative influence of Indian coronavirus mutation. COVID cases continue to rise in India, and investors are keeping close tabs on the oil supply," said Naeem Aslam, chief market analyst at Ava Trade.

And the International Energy Agency's recent report that all new oil and gas exploration projects must stop from this year to limit climate change shows the pressure large oil producers are facing.

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