Oil prices continued to advance on Thursday, two days after Saudi Arabia surprised the market by volunteering to cut 1 million barrels of daily output in February and March.
Brent crude, the international benchmark, was around $54.52, up 0.4% for the day, and West Texas Intermediate, the U.S. standard, is solidly above $50, where it was before the pandemic choked off demand.
The S&P 500 is up 1% this year and hit another high Thursday.
Saudi Arabia has been trying to stabilize the price of oil, which plunged more than 20% last year as the pandemic slowed down economic activity and forced many businesses to close for stretches.
Analysts have watched inventory levels to gauge whether demand has returned, a sign that businesses are starting to get back to normal. Last week, U.S. crude stockpiles fell 8 million barrels, far more than the expected 2.1 million-barrel decline.
That marked four consecutive weeks of inventory declines, according to data from the Energy Information Administration, but early December did record a 15 million-barrel increase.
Analysts have raised their outlook on the sector. Late last month,
said producers like Exxon were oversold and recommended them as a Buy.
Truist analysts this week raised their price target for Chevron to $97 from $90, with a Buy rating. They raised their price target on Exxon to $45 from $39 last month, while repeating their Hold recommendation.
A fresh round of lockdowns and a record number of new coronavirus cases threatens to undercut demand again, forcing a debate among members of the Organization of Petroleum Exporting Countries, led by Saudi Arabia, and other producers such as Russia.
Earlier this week, the group agreed to keep production stable, but then Saudi Arabia announced its production cut while allowing for incremental increases by Russia and Kazakhstan.
Saudi oil minister Abdulaziz bin Salman called the kingdom’s move a sign of “good will.”
But the move may not be enough to sustain oil above $50, RBC Capital Markets analyst Michael Tran says. He points to something known as the crack spread, or the difference between the price of crude and the price of the products made after processing it, such as distillates and gasoline.
When the average of gasoline and distillate crack is $14 a barrel or lower, WTI crude is only above $50 about 20% of the time, he said. Right now, that crack is $12.50.
“Watch this space as a proxy for a pick-up in demand as well as the pace setter for crude pricing over the coming months,” Tran said.
Write to Liz Moyer at Liz.Moyer@barrons.com