Rashid Husain SyedWith the Brent crude oil price touching $65 last week, markets have entered the hot zone.

Inclement weather, the resultant rising demand for heating, a dip in United States output and the unilateral Saudi output cut all helped to tighten the markets, contributing to the bull run.

Parts of the U.S. have been in a deep freeze. Texas registered some of its coldest temperatures in more than 30 years – with some areas hitting -18C early last week. The energy grid was overwhelmed by a surge in demand.

The Texas disaster impacted the overall U.S. crude oil output. More than four million barrels per day (bpd) of United States output – almost 40 per cent of its production – went offline, reported Alex Longley for Bloomberg News.

“The market is underestimating the amount of oil production lost in Texas due to the bad weather,” Ben Luckock, co-head of oil trading at commodity giant Trafigura Group, told the press.

Amid the severe storms, oil refining was also disrupted. Several refineries went offline as a result of the big freeze. The largest refineries in North America shut down on Feb. 15 because of the Arctic conditions. That disrupted electricity, water and fuel supplies across Texas. More than three million barrels of daily oil-processing capacity was idled in the wake of the record-setting cold, consultant Energy Aspects Ltd. reported.

But how long will the bull run last?

Several things could reverse the trend.

U.S. output will emerge from this calamity – ultimately. The refining disruption isn’t permanent. But it will result in tightening supplies and higher prices for everything from gasoline to propane in coming days and weeks. That will keep markets firmed up for some weeks. But with the storm subsiding, things will slowly return to normal.

In the medium term, we need to keep a close eye on several fronts.

Citing unnamed advisers to Saudi Arabia, Dow Jones is reporting that the Saudis plan to boost oil output in the coming months.

Russia also appears keen to expand output. The global oil market is balanced, and the current price of oil fully reflects this market situation, Russian Deputy Prime Minister Alexander Novak told the press last week. Analysts see this as a signal from Moscow about the desire to push for a more aggressive easing of the cuts at the next OPEC+ meeting.

The Organization of Petroleum Exporting Countries’ second-largest producer, Iraq, boosted its crude oil exports by 4.4 per cent to 3.44 million bpd in the first two weeks of February, data compiled by Bloomberg showed.

With the cold weather spurring a string of refinery outages and keeping more Americans off the road, the overall demand for crude and fuel is still weak. So technical indicators show crude is due for a pullback.

In addition, post-pandemic demand patterns remain uncertain.

The 14-day relative strength indexes for both the U.S. and global crude benchmarks remain above 70, a sign the commodity is overbought. West Texas Intermediate futures are up more than 25 per cent this year as Saudi Arabia’s deep output cuts and an improving demand outlook encourage investors.

West Texas Intermediate’s nearest contract is trading at a premium to the following month after the Energy Information Administration in the United States reported the decline in supplies held in Cushing, Okla., storage hub. The key spread flipped into contango (where future prices are higher than the spot market), a signal of mounting supplies, as freezing temperatures spurred refinery outages and other infrastructure issues last week.

The overall scenario may not be as rosy as it’s being painted by some.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.

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