Crude oil tests one-year highs as market eyes OPEC+ compliance

Crude futures settled near one-year highs Feb. 2 amid a focus on OPEC+ production compliance and improved demand outlooks.

NYMEX March WTI settled $1.21 higher at $54.76/b and ICE April Brent climbed $1.11 to $57.46/b.

A second OPEC production survey, this time by Bloomberg, confirmed the group's over-compliance to cuts in January, with production coming in at around 120,000 b/d less than the 22.12 million b/d agreement.

OPEC+ ministers will convene Feb. 3 for a monitoring committee meeting. With production quotas set through March and oil prices rising to pre-crash levels on the back of Saudi Arabia's surprise extra output cut, delegates say they expect relatively peaceful talks on the committee's usual agenda items of quota compliance and oil market forecasts.

The monitoring committee is likely to stress the importance of fulfilling cut commitments, including so-called "compensation cuts" owed by several members.

Conventional wisdom and historic precedent suggest the rise in prices may erode OPEC+ production discipline. Compliance among the 10 OPEC members and nine non-OPEC countries with quotas under the deal slipped to 99% in December from 101% in November, according to several delegates who have reviewed the data that the committee will discuss.

Front-month Brent and WTI were last higher in late February 2020.

"Cuts by OPEC have had the desired effect, and the main caveat with OPEC is compliance rates," Geordie Wilkes, head of research at Sucden UK Ltd. said. "I think the cut by Saudi is certainly a sign of willingness to cooperate and get a deal, but also a sign that on the demand side things are still poor ... March, April does looks slightly more rosy."

Saudi Arabia announced in January that it would voluntarily cut output by 1 million b/d in February and March.

Demand outlook

NYMEX March RBOB settled up 2.59 cents at $1.6160/gal and March ULSD climbed 2.77 cents to $1.6746/gal.

Demand outlooks received a boost from positive developments on the global pandemic front. In the US, daily vaccinations outpaced the number of new COVID-19 infections for the first time Feb. 1.

"The Biden administration appears well on the way to hitting their goal of a 100 million vaccination in 100 days. US COVID new cases and hospitalizations are both declining, while vaccinations have eclipsed the total number of coronavirus cases," OANDA senior market analyst Edward Moya said in a note. "The demand outlook continues to improve alongside the global economic recovery. The biggest risk remains a setback in Chinese crude demand and so far that does not seem to be happening."

China's mass migration ahead of the Lunar New Year holiday, also referred to as Chunyun, is unlikely to affect gasoline and gasoil demand, consultancy Facts Global Energy said Feb. 2.

Recent pandemic flare-ups have prompted Chinese officials to discourage citizens from traveling during the upcoming Lunar New Year holiday, but despite these efforts the negative impact on transportation fuel demand is likely to be limited compared to the same period during 2020.

S&P Global Platts Analytics projected China's gasoline demand at about 3.4 million b/d in January-February, up 20% year on year but 5.5% below the level in the same period of 2019.

The holiday began Jan. 28, and according to Chinese Ministry of Transport data, both rail and air passenger volumes were 70% lower than in the first few days of last year's migration period.

FGE said it continues to expect a shift to personal cars, as people are likely to avoid public transportation, for long-distance travel in China, after vehicle traffic on highways during the first few days of Chunyun saw a much smaller decline of 5%-10%.