Oil prices hit a one-year high early on Tuesday on the back of improving market fundamentals and a general risk-on market sentiment.

As of 10:08 a.m. ET on Tuesday, WTI Crude was up by 2.45 percent at $54.85, after hitting $55 earlier in the day, and Brent Crude was trading up 2.32 percent at $57.65.  

Oil prices on Tuesday extended their gains from Monday, amid expectations that the oil production curbs by OPEC+ and its leader Saudi Arabia would tighten the market in the first quarter. Saudi Arabia has said it would reduce its crude oil production by an additional 1 million barrels per day (bpd) beyond its quota in the OPEC+ pact.

The members of the alliance were estimated to have complied almost completely with their production cut quotas in January, giving the market hopes that the producers would not over-produce now that the cuts were eased by 500,000 bpd last month.

Russia, the leader of the non-OPEC group in the OPEC+ pact, is estimated to have stayed within its 125,000-bpd allowed production rise in January. According to Reuters estimates, Russian oil production rose last month, but the 120,000-bpd increase in production from December was lower than the 125,000-bpd additional allowed rise.

The futures curve continues to firm into backwardation, the state of the market that points to tighter supplies with the prices of the nearer futures contracts higher than those further out in time.

OPEC Secretary General Mohammad Barkindo was also pleased with the backwardation at the opening of the OPEC+ panel meeting on Tuesday.

“With the crude oil market currently switching into backwardation, we are hopeful that 2021 will be a good year for overall demand,” Barkindo said.

“Boosted by a general increase in risk appetite as seen through stocks together with an improved fundamental outlook. Saudi production cuts combined with strong Asian demand have, despite lockdowns and reduced mobility, started to bite with the backwardation in Brent rising to a one-year high, a sign that large stockpiles are shrinking fast,” Saxo Bank said in market commentary early on Tuesday.

“Also, in China, the recent liquidity squeeze may be over for now thereby reducing demand risks from the world’s biggest importer,” Saxo Bank’s strategy team wrote.  

By Tsvetana Paraskova for Oilprice.com

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