Speculators have been selling oil for the past two weeks as prices continue to rise and appetite for profits increases. No one knows how long it will last, but it could intensify this week.
Oil prices started to rise last November, when the first news about the safety and efficacy of the vaccine emerged. Then, oil prices suffered a series of small declines. After that, navigation has been smooth since January, thanks to the mass launch of vaccines that are expected to boost demand for oil soon.
In addition to vaccinations, however, OPEC + continued to maintain a production limit, with Saudi Arabia taking a unilateral cut of 1 million bpd, in addition to its OPEC + quota. The cuts have been effective, as cuts in production tend to be, reducing global crude oil stocks.
As a result of these developments, more people started talking about a rebalancing market and the possibility of an oil shortage – something that would have been a ridiculous idea just a year ago. But expectations for a tighter oil market have been strong and have pushed oil prices up. More recently, reference contracts have also gained momentum with a series of attacks by Yemeni Hutile rebels against Saudi oil infrastructure.
Earlier this week, Brent oil hit $ 70 for the first time in 14 months, according to the Financial Times, although only briefly, shortly after the media reported the attacks. Even though Riyadh said there was no serious damage and no loss of production due to the attack, traders reacted as they always do to the news of an attack on Saudi oil infrastructure: they started buying oil, pushing the price up.
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According to John Kemp of Reuters, institutional traders have been selling oil for the past two weeks. Part of this was motivated by the realization of profits and part was the result of bets on a future price drop. However, profit-taking has been subdued: Kemp reports that the funds sold a total of 20 million barrels in the six futures and most traded options on oil and oil production. This compares with a weekly purchase rate of 36.53 million barrels in the previous 15 weeks.
The most recent reports on oil price movements, however, suggest that this particular price boost will not be long lasting. Prices have already fallen after reaching their multi-month highs, pressured by a stronger US dollar and the fact that Houthi’s attack on Aramco’s infrastructure has not affected production.
The dollar rose this week after the Senate granted preliminary approval of President Joe Biden’s $ 1.9 trillion stimulus bill, and final approval is expected this week, possibly even today. The stimulus package is one of the factors that analysts have pointed out as crucial for the recovery of oil demand by the world’s largest consumer.
That package, along with OPEC + cuts, could hypothetically push prices even higher – closer to the $ 80 a barrel that Saudi Arabia needs to balance its budget – but for now this is only a hypothetical possibility. While the oil cartel has removed competition from U.S. shale producers in the midst of the pandemic, and while shale producers themselves have been careful not to resume production growth, that could change at prices of more than $ 70 a barrel.
“Peak oil was an automatic reaction to a shocking OPEC + decision,” Vandana Hari, founder of Vanda Insights, told Bloomberg earlier this week. However, “the kingdom may be running out of luck if it follows the path of the hawks for too long.”
Headwinds outside OPEC + and shale punches also remain. In the United States, for example, several medical experts have warned states not to rush to relax their movement restrictions amid an increase in new variant infections with the coronavirus. In Europe, new variants are marching between countries, raising new infection rates once again. This increases the uncertainty in the outlook for oil demand and, in turn, the uncertainty leads to greater price volatility. The message remains “Expect the unexpected”.
By Irina Slav for Oilprice.com
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