Oil Market Has Plenty of Wild Cards Remaining

Oil Market Has Plenty of Wild Cards Remaining

Saudi Arabia's decision to dramatically cut its oil output was a pleasant New Year's surprise for energy investors. Developments in the world's two largest economies could cut the party short.

The kingdom's move has helped send front-month Brent crude oil prices up by 7% in two weeks to above $55 a barrel. The cut erases a substantial 1 million barrels a day of supply—about 1% of world demand—in February and March, at a time when the market still faces uncertain oil demand with surging Covid-19 cases.

The operating assumption is that any drag on demand will be short-lived and that other producers remain chastened by 2020's price crash. A report released by the Organization of the Petroleum Exporting Countries on Thursday is encouraging: After reducing its 2021 oil demand forecast in the past four consecutive reports, the latest one kept its December estimate. It expects demand to increase by 5.9 million barrels per day from 2020 to average 95.9 million barrels a day. It has also kept its oil supply forecast largely unchanged.