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Oil prices move up as traders eye signs of improving energy demand

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Oil futures moved up on Tuesday, shaking off earlier weakness, as signs of improving energy demand put global benchmark prices on track to tally an eighth consecutive session gain.

“With supply dynamics of the global oil market as clear and steady as they have been in years, trader focus has turned to demand in recent sessions, and with the continued vaccine distribution efforts, falling COVID case counts, and another huge stimulus package working its way through Congress, demand expectations are rising,” analysts at Sevens Report Research wrote in a Tuesday newsletter.

The U.S. benchmark West Texas Intermediate crude for March delivery
CL.1,
+0.41%

CLH21,
+0.41%

rose 38 cents, or 0.7%, at $58.35 a barrel on the New York Mercantile Exchange following six consecutive sessions of gains.

April Brent crude
BRN00,
+0.73%

BRNJ21,
+0.73%

tacked on 55 cents or 0.9%, at $61.11 a barrel on ICE Futures Europe after settling above $60 Monday for the first time since Jan. 24, 2020. A gain on Tuesday would mark its eighth in a row.

“After losing momentum through much of January trading, the crude complex has posted a strong rally over the past two weeks,” bringing Brent above the $60 a barrel level, said Robbie Fraser, manager of global research and analytics at Schneider Electric, in a daily note.

“That rally has been aided by longer-term optimism and expectations of broader market strength, but current prices are likely to generate some anxiety that the rally is near overextended territory,” he said.

Oil rallied Monday as equities continued their surge, helping to lift major U.S. benchmarks to another round of all-time highs. Broad-based market optimism remains tied to expectations for another large round of government aid under President Joe Biden’s $1.9 trillion proposal, as well as progress on vaccine rollouts around the world.

Meanwhile, Saudi Arabia’s decision to unilaterally cut output by 1 million barrels a day in February and March is seen helping to keep supplies in check, analysts said.

COVID-19 related business restrictions are likely to remain a risk though until there’s a clear increase in global vaccination rates, said Warren Patterson, head of commodities strategy at ING, in a note.

Also, price levels have risen to levels that look increasingly attractive to producers, which could lead to a pickup in output that should provide some resistance to prices, Patterson said, noting that the U.S. has seen a consistent rise in the shale oil-rig count since late November.

Schneider Electric’s Fraser said crude prices in the $55 to $60 range have “historically been sufficient for triggering new production activity in parts of major U.S. shale basins.”

“While the current supply/demand balance skews towards undersupply, global crude and product stocks remain elevated, and any rebound from U.S. supply could further prolong a full recovery,” said Fraser.

In a monthly report issued Tuesday, the Energy Information Administration cut its 2021 U.S. crude production forecast by 0.8% to 1102 million barrels per day, but also lifted its 2022 output forecast by 0.3% to 11.53 million barrels per day.

Meanwhile, the prospect of an eventual return of Iranian exports and an unwinding of the record deal between the Organization of the Petroleum Exporting Countries and its allies, together known as OPEC+, “offer additional downside price risk,” Fraser said. Still, “recent setbacks in Libya’s export recovery serve as a reminder that geopolitical risk continues to challenge production in several key regions.”

Back on Nymex, prices for petroleum products also declined, with March gasoline
RBH21,
-0.26%

down 0.2% at $1.6718 a gallon, while March heating oil
HOH21,
+0.33%

added 0.4% to $1.7546 a gallon.

March natural gas
NGH21,
-2.15%

shed 2.4% to $2.813 per million British thermal units.

Weekly data on U.S. petroleum supplies will be released by the American Petroleum Institute late Tuesday, followed by the EIA early Wednesday.

On average, domestic crude supplies for the week ended Feb. 5 are expected to show a decline of 2.7 million barrels, according to a survey of analysts by S&P Global Platts. The survey also show expectations for a climb of 2.7 million barrels in gasoline stockpiles and a fall of 1.7 million barrels for distillate inventories.

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