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Relief rally lifts oil to biggest January gain in decades

Oil posted its largest January gain in at least 30 years as strong demand and supply constraints drained inventories, adding fresh thrust to forecasts of $US100 a barrel Brent crude ahead of Wednesday’s meeting between the major oil exporters.

The global benchmark posted its sixth consecutive weekly gain last week, taking its January advance to 17 per cent, which is its biggest monthly gain since February 2021. Brent crude added 1.3 per cent to $US91.21 a barrel overnight, while West Texas Intermediate rose 1.5 per cent to $US88.15 a barrel.

Oil has started the year with a bang as market fears of another COVID-19-induced hit to demand failed to materialise, and the Organisation of Petroleum Exporting Countries and its allies (OPEC+) struggled to increase output in line with an agreed rise in quotas.

Supply troubles in Libya and Nigeria have heightened the market’s anxiety that spare capacity might not be enough to cover geopolitical disruptions such as the rising tensions between Russia and Ukraine.

“At the end of last year, the market was pretty bearish considering the uncertainty around omicron, but data in late December and January has shown that the impact hasn’t been as bad as expected, so we’ve seen this relief rally,” said senior commodity strategist at ANZ, Daniel Hynes.

“The sustainability of this rally has largely been driven by supply side issues… there’s been a resetting of expectations.”

OPEC+ will meet on Wednesday and is widely tipped to stick with plans to boost output by 400,000 barrels a day in March.

The alliance agreed to new production quotas in July last year and has raised its output by 400,000 barrels per day for every month since August. But after several years of under-utilisation and reduced investment, producers are struggling to ramp-up output fast enough.

The International Energy Agency estimated that OPEC+ production increased by just 250,000 barrels per day in December as Nigeria, Angola, Malaysia and Russia all fell short of their targets, bringing the cumulative underproduction to 790,000 barrels per day for the month.

Since the new deal in July, ANZ calculated that the alliance has under-delivered by more than 3 million barrels per day.

OPEC’s underperformance comes as risks of unplanned supply disruptions increase, with the threat of a Russian invasion of Ukraine growing which would likely lead to some form of retaliation by Western leaders.

Markets are particularly concerned given Russia produces about 10 per cent of global oil supply and is a key member of OPEC+.

“Restrictions could be placed on the financing and equipment going to Russia’s upstream oil sector. At this stage, though, wide scale sanctions on Russia’s oil industry seem unlikely,” Mr Hynes said.

“Restrictions on Russian crude oil amid global shortages would be unpalatable, given US sensitivity to gasoline prices. In reality, any sanctions placed on Russia would see oil markets benefit from increased demand.”

Meanwhile, cold weather in the US has continued to boost demand for fuels, as Boston reported record snowfall over the weekend.

US gasoline demand returned to its five-year seasonal average for the week ending January 14. UK transport is back to 90 per cent of 2020 levels after falling to 65 per cent in late December.

While the rest of Europe is lagging the UK in terms of a peak in virus case numbers, ANZ noted that cities including Rome and Madrid have seen traffic numbers increase week-on-week.

This supply-demand dynamic led ANZ to increase its short-term price target for Brent crude to $US95 a barrel. Meanwhile, Morgan Stanley joined Goldman Sachs in predicting oil will reach $US100 a barrel. Bank of America is expecting to see $US120 barrel oil by June.

Source: Financial Review