Crude oil futures have been rising in recent weeks, defying the usual profit-making trend ahead of the Christmas holiday. WTI was trading at $ 49.20 in Friday’s session, with Brent crude trading at $ 52.40, levels last reached in February, before the oil price fell.
Of course, the big question for most traders at the moment is whether this high has legs to continue through the festive period and beyond.
On a purely technical basis, crude oil has been rising higher on the weekly chart since April. The most recent peak occurred on December 10, with the next expected around the $ 50 psychological level at NYMEX. The next levels of technical resistance are at the mid-February high of $ 54.50, as well as the 2020 peak of $ 65.65.
The oil and gas benchmark, SPDR fund of selected energy sector (XLE), gained 12% in the last 30 days, compared to a 4% gain by S&P 500.
Here are three main reasons why we remain optimistic about the oil market.
Vaccines for covid-19 A major reason why the energy sector has emerged as the best performing in recent weeks is a flood of potential Covid-19 vaccines becoming available.
The launch of the Pfizer-BioNTech The BNT162b2 mRNA-based vaccine was launched in the United States last week. The vaccine arrived at the long-term care facility a few days ago with Walgreens seeking to expand the program to nearly 3M residents and employees in 35,000 long-term institutions. So far, just two people Cases of severe allergic reactions to the vaccine have been reported by both middle-aged health professionals. However, health experts have sent reassurance that the vaccine is still safe for the general public. Related: Increase of oil and gas platforms for the fifth consecutive week
The trajectory of the vaccine so far suggests that the majority of the American public will probably have received the vaccine by the end of February, better than a third of the target population that Dr. Moncef Slaoui, chief of Operation Warp Speed, had previously received.
In the meantime, the EU is due to launch its vaccination program on December 27, 2020. A few days ago, Moderna Inc. announced that the European Commission exercised its option to purchase an additional 80M of its candidate vaccine COVID-19, expanding the company’s total order commitment to 160M doses.
The initial success of the implementation programs has instilled much optimism in the oil markets, even with conservatives BP Plc (NYSE: BP) backtracking on its previous projections that we could have passed the peak of oil with the company now saying that oil demand may not peak until around 2030.
# 2. Stimulus Package After all the predictions of doom and gloom, the global economy appears to be recovering from the devastating pandemic in a clip faster than expected. In fact, a handful of sectors in the US and other economies have actually recovered from pre-crisis activity levels. An important reason for rapid recovery: unprecedented stimulus packages.
Shortly after the World Health Organization (WHO) declared Covid-19 a global pandemic, governments everywhere released huge monetary and fiscal stimuli (more than $ 15T globally) in an attempt to prevent an economic downturn. The US federal government has intervened with a wide range of measures, including a package of $ 2.3 trillion designed to support financial markets, state and local governments, employers and families.
Congressional leaders finally agreed on another $ 900 billion aid package on Sunday after narrowly avoiding a government shutdown on Friday going through a two-day extension funding that kept the agencies up and running overnight on Sunday. Congress voted on the new stimulus on Monday night and it passed.
Related: The biggest energy law in a decade has just been passed
Several analysts have warned that generous packages may again bite markets. New York Times bestselling author and founder of The Bear Traps Report, Lawrence ‘Larry’ McDonald warned of the ‘snake effect’ where the stimuli destined to save the economy will instead ” …cause a hyperinflationary economic collapse.”
However, government stimulus has proven to be an effective tool, at least in the short term.
# 3. OPEC + Agreement
Two weeks ago, OPEC + members met to discuss future production plans, with current production cuts expected to expire at the end of the year.
The bulls expected the oil-producing cartel to extend the current production cuts of 7.7 million barrels a day for at least another three months. Instead, they received a shake-up after OPEC + announced that it will increase production by 500,000 barrels per day starting in January, effectively reducing total production cuts in early 2021 to 7.2 million barrels per day.
Surprisingly, oil prices have continued to rise since the announcement, after an initial drop. An energy analyst explains why:
“500,000 bpd as of January is not the nightmare scenario the market feared, but it is not what was actually expected weeks ago. Markets are now reacting positively and prices are registering a small increase, as 500,000 extra supply is not deadly for sales”Said Paola Rodriguez Masiu, senior oil market analyst at Rystad Energy.
In other words, the market is happy that the 23-member organization appears to be cautious about its production.
Another encouraging sign: the main protagonists, Saudi Arabia and Russia, seem to be reading on the same page this time.
With the harsh lessons of April’s oil price drop still fresh in mind, OPEC + is unlikely to return to meaningless market share and price wars soon, and therefore risk sinking markets again.
By Alex Kimani for Oilprice.com
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