Oil Prices to Enter Period of Consolidation

The crude oil market has been exceptionally strong in recent weeks, with inflows to the oil complex relentless. Importantly, lower than expected OPEC+ supply through January (driven largely by production issues in Nigeria) and higher than expected consumption elsewhere has allowed the market to absorb weakness in consumption associated with a return to lockdowns in Western Europe, without significantly weakening the fundamental balance. We expect the continued bid across risky assets to continue to spill over into the oil market, for as long as belief in the 2H-21 re-opening story remains. However, from a fundamental perspective, the key word for the oil market now is consolidation. The appearance of tightness can be attributed to the large volume of oil OPEC+ are holding off the market and recent price action is a clear signal for the group to start returning supply. Our current OPEC+ supply forecast is above consensus for the balance of 2021, driven firstly by the temptation to cheat from member states in precarious fiscal positions and second by a growing number of member states aligned with Russia’s market share stance (most importantly, the UAE). We therefore expect oil prices to enter a period of consolidation after a breath-taking start to the year as the market digests the coming increase in OPEC+ supply .