Global crude oil prices rose to their highest levels in a year in early February. Tighter supply and an improved economic outlook for the second half of 2021 lent support to the market as it continues a slow recovery from the shock delivered by the coronavirus pandemic.

Brent crude oil, the global benchmark, breached $60 per barrel in futures trade for the first time since January 2020, and it moved even higher after the International Energy Agency and OPEC both indicated that market balance would be achieved in the second, rather than the first, half of 2021. “The rebalancing of the oil market remains fragile in the early part of 2021 as measures to contain the spread of Covid-19, with its more contagious variants, weigh heavily on the near-term recovery in global oil demand,” the IEA said in its Oil Market Report on February 11.

The IEA, citing adjustments to historic data, lowered its oil demand estimate for 2021 by 200,000 barrels per day, to 96.4 million barrels per day, which implies a recovery of around 60% of volume lost to the pandemic in 2020. OPEC in its February Oil Market Report also adjusted its demand growth estimate down by 110,000 b/d to 96.05 mb/d because of an upward revision to 2020 demand. OPEC now expects oil demand to increase by 5.8 mb/d in 2021, a partial recovery from the dramatic contraction of 9.8 mb/d in 2020 but still short of 2019 demand. It cautioned that the forecasts for economic and oil-demand growth hinge on a faster administration of vaccines and the easing of travel restrictions in major economies.

Some bullish market sentiment can be attributed to Saudi Arabia’s decision to start implementing a unilateral production cut of 1 mb/d in February and March. The surprise move was prompted by the OPEC kingpin’s determination to see a faster drawdown of bloated global oil inventories, which peaked at 3.7 billion barrels in 2020 as demand evaporated. Inventory levels are coming down due largely to production discipline by OPEC and its Russian-led allies – OPEC+. Both the IEA and OPEC expect a faster drawdown of inventories in the second half of the year, when the market is expected to flip from a supply surplus to a deficit. This, along with tepid growth in non-OPEC supply, “sets the stage for OPEC+ to start unwinding cuts even if producers outside the group ramp up faster than currently projected,” according to the IEA. The IEA projects supply falling short of demand by an estimated 850,000 b/d while OPEC expects a deficit of 1.2 mb/d.

The next indicator will be the early March OPEC+ meeting when ministers are due to decide whether to ease output restrictions beginning in April. Russia, which has been co-managing production policy within the OPEC+ group with Saudi Arabia, will be looking more at price rather than inventories for signs of a faster recovery in U.S. oil production. Moscow has made known its concern over the possible loss of market share if output curbs are prolonged, allowing the United States and other producers not bound by restrictions to fill in any supply gap. A disagreement between Saudi Arabia and Russia over the timing of preemptive action on supply in March 2020 led to the dramatic slide in oil prices when Saudi Arabia responded by opening up the taps, eventually forcing the Russians to fall in line. That led to the April 2020 accord by the OPEC+ producers to slash production by close to 10 mb/d with a few other producers, including the United States, Canada, and Norway, pitching in to help stabilize the market. The original intention by the OPEC+ alliance was to ease the restrictions gradually starting in January, but the fragile and uneven recovery led to a more cautious approach. Rather than bringing on 1.9 mb/d all at once in January, as originally envisaged, the group decided for a phased increase of just 500,000 b/d in January, with Russia and Kazakhstan allowed an additional small increase of 75,000 b/d between them as a palliative.

OPEC producers, like Iraq and Nigeria, that have not complied fully with their allocations were given until April to compensate for overproduction. The Saudi gesture to take on the burden of an additional cut outside the agreement was a concession to countries like Iraq, where the economy was close to collapse at the end of 2020. The OPEC+ supply reductions, totaling 2.1 billion barrels since April 2020, helped to improve market fundamentals. But the producers will be keeping a close eye on both inventory levels and a potential increase in supply from OPEC and non-OPEC producers before adjusting supply. The last meeting of the Joint Ministerial Monitoring Committee, chaired by Saudi Arabia and Russia, in early February made no specific recommendations beyond praising the high level of compliance and urging all parties to stay the course through March.

Among OPEC members, Libya, Iran, and Venezuela are exempt from the production cut agreement because of their specific circumstances – internal conflict in Libya, U.S. sanctions against Iran, and a combination of U.S. sanctions and bad management in Venezuela – but output from all three has been creeping up in recent months and may influence the speed at which global inventories are drawn down. Libya managed to restore oil output to 1.2 mb/d in January as rival factions reached a political settlement. But whether it can raise production further and sustain output at higher levels depends on whether the agreement holds and sufficient funds are allocated to the Libyan National Oil Corporation to carry out necessary repairs to creaky infrastructure. A leaky pipeline and a strike at a key export terminal forced production shutdowns earlier in February. Iran, meanwhile, has been gearing up for a return to oil markets in anticipation of less stringent monitoring of U.S. sanctions by the new administration of President Joseph R. Biden Jr. Iranian production rose by 62,000 b/d in January to 2.08 mb/d, roughly half its total production capacity pre-sanctions. Recent declarations from Tehran and Washington do not point to the likelihood of an imminent resolution that would allow Iran to export oil freely. Biden has said he will not lift sanctions on Iran to bring Tehran back to the negotiating table. Venezuela, which has seen sharp declines in its output capacity, added 72,000 b/d in January, according to OPEC’s February report.

The Brent futures contract for April delivery traded at $63.26/bbl on February 15 and U.S. West Texas Intermediate futures rose above $60/bbl, effectively regaining a large percentage of the losses seen in 2020 and allowing for the return of some higher cost production like U.S. shale and Canadian oil sands. According to the IEA, as things stand, global oil output could rise by more than 1.6 mb/d in 2021 if producers outside of the OPEC+ group pump more, OPEC+ eases output curbs, and Libya manages to sustain higher production. Producers outside of OPEC+ would account for a year-on-year increase of 830,000 b/d in 2021 compared with a 1.3 mb/d decline in 2020. The IEA expects U.S. oil production to stabilize at around 16.6 mb/d in 2021 after falling by 580,000 b/d in 2020. Brazil, Norway, Guyana, and Canada will also contribute to the increase.

It is not just the oil patch that has seen a price spike since the start of the new year. Global commodity and metal prices have also soared in what some analysts are now calling a “commodities supercycle.” Liquefied natural gas prices have also set new records in recent weeks due to a combination of cold weather, production shutdowns, sky-high LNG tanker rates, and strong demand in Asia, where LNG prices are linked to crude oil. Demand was particularly strong in Japan, which was forced to pay high premiums to secure LNG on the spot market with one cargo selling for $40 per million British thermal units compared with close to $2 per million British thermal units in early 2020, when demand for natural gas and LNG fell. Although the huge price increase may prove seasonal, and prices have since come off slightly, it was an indication of the return to high levels of volatility in some commodity markets.

Copper, iron ore, steel, tin, and other metal prices have also soared. Some of this is due to a confluence of demand in several parts of the world as industrial activity, construction, and trade have picked up. Some of the price spikes have been attributed to shifting demand for certain products as a result of pandemic-induced behavioral changes and stockpiling. The Financial Times reported a “buying frenzy” sent tin prices to a 7-year high. Tin is a component in production of electronics used to produce solder for computer circuit boards and wiring. The shift to working from home, which may become a permanent post-pandemic structural change, is behind the higher demand for computers and other electronic devices.

Toril Bosoni, the recently appointed head of the IEA’s Oil Markets Division, referred to these structural changes, including shifts in mobility patterns and work practices, that she said would influence the shape of the recovery. “We believe that we will recover as the economy recovers and as the epidemic is brought under control,” she said at the Atlantic Council’s Global Energy Forum in January. “But some of the changes are structural and it is likely that a big portion of business travel will be replaced by virtual meetings,” she added.

Chris Midgley, Global Head of Analytics at S&P Global Platts, pointed out that business travel drives demand because, even if it makes up just 13% of passengers, it accounts for 70% of all aviation travel revenue. The slump in air travel is likely to persist so long as the coronavirus “drag” persists, which would make a recovery to 2019 levels unlikely before 2026, he said at the same forum.

These uncertainties and shifting demand patterns make it difficult to predict how producers will respond. For now, the OPEC+ producers seem to have adopted a wait-and-see attitude, but with so many variables, future surprises like Saudi Arabia’s production cut cannot be ruled out. Should the recovery take longer than current projections indicate, maintaining production discipline would become more difficult for the smaller producers, and they may be tempted to cash in now while prices are high.