Recent Oil Rally Largely Driven by Supply-Side Factors: National Bank of Kuwait

Oil’s recent rally has been largely driven by supply-side factors, National Bank of Kuwait (NBK) said. In its latest economic update NBK Economic Research Department said the supply side factors for the oil’s recent rally include outages in oil producing countries (in OPEC+ only around two-thirds of the 400,000 per barrel monthly supply increase has actually materialized) and continued supply discipline by US shale producers.

This, along with lessening fears over the economic disruption caused by Omicron, could mean that Q1, 2022 stock builds end up being smaller than anticipated, which would support prices at current levels. Brent notched up a third consecutive week of gains last week, closing up 5.1% week on week at US$81.8/b as outages in Libya and conflicts in Kazakhstan raised supply concerns. OPEC+ agreed at the recent meeting to continue unwinding supply cuts in February at the monthly rate of 400,000 bpd.

Global stocks were mostly negative last week, concerned by the likelihood of a faster-than-anticipated increase in US interest rates. The MSCI AD World lost 1.4% w-o-w, led by a 1.9% drop in the S&P500. In contrast, supported by higher oil prices, the MSCI GCC rose 1% w-o-w, with Qatar and Kuwait up 2.9% and 0.8%, respectively, NBK said. US data releases showed continued price pressures and tight labor market conditions would only strengthen the Fed case, as revealed in their hawkish December meeting minutes, for a sooner-than-expected interest rate lift-off in March.

The US unemployment rate (derived from a different survey) fell to 3.9% in December from 4.2% in November, its lowest level since the outbreak of the pandemic. Meanwhile, minutes from the Fed’s December meeting showed that members were prepared to start shrinking the Fed’s balance sheet after the first rate hike and at a faster pace than in the previous tightening cycle, NBK said.