Oil Price Fundamental Weekly Forecast – After OPEC+ Decision, Focus Will Shift to Vaccine Impact on Demand

The direction of the U.S. West Texas Intermediate and international-benchmark crude oil futures market this week is likely to be determined by trader reaction to the OPEC+ meeting on January 4 that will decide new production levels. Members of the OPEC group of oil producers and their allies will meet via videoconference on Monday to decide production levels for February, hoping to provide a ray of hope for prices after a dismal 2020.

Last week, February WTI crude oil futures settled at $48.52, up $0.29 or +0.60% and March Brent crude oil closed at $51.80, up $0.51 or +0.98%.

The need for the OPEC+ ministerial meeting came about last year after oil demand tanked in early 2020 due to the COVID-19 pandemic. The meeting was also necessary to soothe tensions between major producers Saudi Arabia and Russia after the two countries started a price war.

Clearly, the moves made by OPEC+ saved the oil market from sustained weakness under $20.00 in my opinion. However, despite the pickup in prices since late October, all buyers could do is regain between 50% and 62% of its losses. Since making that move during a seven week rally, the markets have stalled the past two weeks, highlighting that the outlook for crude over the near-term remains uncertain.

Nov/Dec Summit Agreement

At their last summit from November 30 – December 3, the OPEC+ members agreed to increase production by 500,000 barrels per day in January. This news came out at the time when vaccine optimism was soaring so it was absorbed easily by speculative buyers. Since then, coronavirus cases have risen, a new variant has been identified and vaccine rollouts have begun although at a much slower pace than predicted.

Also at the December summit, the 13 members of the OPEC cartel, led by Saudi Arabia, and their six allies led by Russia, also agreed to meet at the beginning of each month to decide on any adjustments to production volumes for the following month. This brings us to Monday’s meeting.

Weekly Forecast

OPEC+ is tapering record oil output cuts made last year to support the market. Now that prices have risen, its members and allies want to cash in by offering more supply for sale. The group is set to boost output by 500,000 barrels per day (bpd) in January, and Russia supports another increase of the same amount in February.

We’re expecting OPEC+ to go along with the February increase of half-a-million barrels per day. On paper, more supply is usually bearish, but it this case, it all depends on how confident traders are in the success of the vaccine rollout.

If traders see demand rising during the first quarter in the wake of the vaccine rollout and despite the surge in coronavirus cases then the markets should be able to absorb the output hike.

If demand concerns move to the forefront then coupled with higher supply, prices could pull back into a value area. We don’t think an OPEC+ increase will kill the rally, but it will force the bulls to find value and take away their incentive to buy strength.

There are other headwinds that could put a lid on the rally including steady U.S. production that is sitting on about 11 million barrels of crude per day. Higher production in Libya, Iran and Venezuela should also add to global supply.

We should know early in the week if a February output hike has already been priced into the market. This will indicate that traders are more concerned about demand issues since there is little OPEC+ can do to generate consumption. If prices do begin to fall, they will have the option to pass on a February production hike.

Taking everything we know into consideration, a successful vaccine launch will probably be the biggest influence on prices this month.

For a look at all of today’s economic events, check out our economic calendar.