Marius Paun | London, UK | Senior dealer | Friday, 16th January 2021
The US crude oil was trading slightly lower on Friday morning as rising coronavirus cases globally reignited demand concerns. However, it remains close to the recent high of $53.92 due to a drawdown in US oil inventories for a fifth straight week and rather robust Chinese economic data. Surprisingly, much of the world went back into lockdown recently but crude prices kept rising. Why is that, since near quarantine measures cannot be great news for air traffic in the short-term?
The stock markets had an incredible recovery after the sell-off in March last year and some investors missed out. But there are still plenty of laggards offering last-minute opportunities for investors who might want to catch up. One such laggard sector is energy which saw a big increase lately but is still down on a relative basis, compared to prices before the Covid-19 pandemic.
On a more specific level, it’s the events within the OPEC+ oil cartel – largely the Gulf nations led by Saudi Arabia and Russia which influenced crude this week. At their meeting, they decided to restrict supply by more than analysts had expected. Although Russia still plans to increase output, Saudi Arabia pledged to cut 1 million barrels of production to counterbalance. The rest of the cartel promised they will keep production unchanged.
It could be they are worried that the new coronavirus strains might spark another bout of evaporating demand and in turn bring prices down again. The spectre of ‘negative’ oil prices happening within less than 12 months surely does not sit well with OPEC+ members. Strange is the fact that Saudi Arabia and Russia were supposed to be rivals, at least officially judging by last year rows.
On top of that, the US election results probably bring another factor into the equation. It’s expected that US shale oil producers will struggle under Democrat Joe Biden who made it very clear that his priority is renewable energy. Shale oil producers have had a tough 12 months anyway, some even went bankrupt and those that are left are trying to consolidate. If Saudis are trying to deliver the final blow to those shale producers, they risk another crash in prices, so it seems to be a short-term strategic move to add a temporary floor.
Nowadays, the importance of oil prices in just about everything being produced seems to be underestimated. Many think it’s a ‘barbaric source of energy’, on its way out, soon to be replaced by solar, wind, hydrogen or many other green forms. Although some old-timers have pointed out that we’re not quite there yet. Yes, renewables are the future but how do you build that massive green infrastructure without oil? What will happen when subsidies will be removed? The storage and transportation problem is still a huge issue. And the intermittence of the solar and wind sources is also a significant challenge.
Right now, low-interest rates are keeping valuations high? It’s been said that stocks are the only game in town. It’s hard to deny it when the alternative is buying bonds which will lose you money after inflation. But what if crude prices go up? Because oil prices are part of just about everything, they bring an inflationary pressure. It becomes harder to keep interest rates down. A case in point? The benchmark 10-year Treasury yield moved above 1% for the first time since March last year with the US dollar index rebounding to 90.7 at the beginning of the week from 89.2 on January 6.
The chart above shows the buyers have been firmly in control since late October last year. The short-term moving averages are now well above the longer-term moving averages and both point higher. Nonetheless, the momentum could be shifting to the downside if a breakthrough $53.92 Wednesday high will be negated.
For the past three days $52.6 proved good support as, so far, the price bounced right off. A sustained move above that level could signal the bulls are still present. Furthermore, a breach above $53.92 will indicate the buying is getting stronger. A move below $52.6 will signal sellers are coming back ready to test support at $50.83 and further down at $49.5.