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Vladimir Zernov
WTI Crude Oil

Oil Video 12.01.21.

Oil Continues To Move Higher As Saudi Arabia’s Production Cut Serves As A Major Bullish Catalyst

Yesterday’s pullback was temporary, and oil quickly moved to new highs. Currently, WTI oil is trying to settle above the $53 level. If this attempt is successful, WTI oil will be just a few steps away from the $55 level.

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Meanwhile, Brent oil has already crossed this mark and is heading towards the $60 level which will likely be seen as a “normal” level by many traders.

Interestingly, December 2021 WTI oil futures are trading below the $51 level so the discount to the front-month contract is more than $2. A similar situation can be seen in the Brent oil market as December 2021 Brent oil futures are trading near the $54 level while the front-month contract is trading above the $56 level.

The current setup, which is known as backwardation, highlights the impact of the recent Saudi Arabia’s decision to cut oil production by 1 million barrels per day (bpd) in February and March.

At this point, oil traders are ready to ignore all risks of additional lockdowns as they believe that Saudi Arabia’s major production cut will help the market in the first quarter of 2021.

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Will U.S. Oil Producers React To Higher Prices?

Tomorrow, EIA will provide its Weekly Petroleum Status Report which will show whether the U.S. oil industry reacted to the recent rally in the oil market.

The number of U.S. rigs drilling for oil continues to increase but U.S. domestic production remains unchanged at 11 million bpd. This is good for the market, and analysts expect that the upcoming EIA report will show that crude inventories declined by 2.7 million barrels.

According to the latest EIA report, crude inventories remained 9% above the five-year average for this time of the year. If inventories continue to decline towards their normal levels, oil will get additional support.

It remains to be seen whether the market will start to price in a more aggressive return of production from OPEC+ in case the current oil price rally continues. While such concerns are valid, any major moves on this front will be made in April when the situation with coronavirus is expected to improve thanks to vaccination and warmer weather in the hard-hit areas.

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

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