Market Overview

3 February 2021

The Oil Market’s Groundhog Day

The oil market seems to be awakening to a cloudy beginning of February and, as a result, it cannot see its shadow. Just like a groundhog, who knows that such a circumstance signals an early spring, the oil market may also assume a turnaround is on its way. Such an analogy may seem fitting as Brent crude benchmark prices topped $57.7 per barrel on February 2, which was exactly the same level that was recorded on the same day last year. A true celebration of another Groundhog Day with hopes of an early economic recovery. 

Probably the most important factor to take into consideration is that these levels were last seen in the “pre-pandemic era”. With this being said, a severe second wave of the coronavirus is not over yet, lockdowns in many countries are still far from being lifted and tightening restrictions are still being imposed, new strains of the virus are being discovered, and the global economic recovery is slower than expected.

A drastic rise in Brent crude prices from the $36 per barrels level in November-December 2020 was probably, to some extent, based on forward looking expectations and emotional thinking which was out of touch with economic reality at the time. The beginning of mass vaccination in various countries and new massive fiscal stimulus expectations in the United States are seen to be fostering expectations of rising business activity worldwide. The decision of the Organsiation of the Petroleum Exporting Countries and its partners (OPEC+) to not curb production cuts until April, together with Saudi Arabia’s move to limit crude output by another 1 mln barrels per day in February-March 2021 still seems to be having a positive effect on prices. 

“Black gold” prices are seen to be nudged by risk that is brought about by sentiment in the market that is stimulated by the money printing press in developed economies. The CBOE VIX volatility index, a measure of risk in the U.S. financial market, fell from January 2021 highs at 37.2 points below 27 points.

So, crude prices are seen to be strengthening in advance, on expectations of more solid fundamental recovery in demand. However, any further direction of price movements of crude may largely depend on many contradictory factors, such as successful containment of the pandemic, economic growth, etc. 

OPEC estimates that demand may only recover by 5.9 mln bpd after it plunged by 10 mln bpd in 2020. A slow recovery in demand to the level reached in 2019 may inhibit prices restoring too, as they are already at the levels of pre-pandemic demand. And such recovery is considered to be fragile as virologists expect a third wave of the pandemic this spring. 

Meanwhile, rising crude prices are clearly ahead of the demand and this could spur the rise of oil production in other countries that are not bound by the OPEC+ deal with the United States leading this production race. The supply could increase more if Iran and Venezuela sanctions are lifted, as the new U.S. Administration is expected to do so.

Thus, after emotional and perhaps exaggerated rise in crude prices since mid-January, the prices have rolled back to the $55-58 range of the Brent crude benchmark and may remain within this range in the first half of 2021, or even decline to $51-55 per barrel. As for the second half of this year, crude prices may benefit in case of economic expansion and rising demand supported by new fiscal stimulus measures in the U.S. In favourable economic conditions, Brent crude prices may break through to $60 per barrel.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


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