Speculators have been selling oil for the past two weeks as prices continue to rise and profit appetite rises. Everyone guesses how long it will last, but it may increase this week.
Oil prices began to rise last November when the first news broke about the safety and effectiveness of vaccines. Then oil prices experienced a series of small falls. After that, navigation has been smoother since January, thanks to the massive launch of vaccines that are expected to soon increase demand for oil.
In addition to vaccinations, however, OPEC + continued to maintain a cap on its production, with Saudi Arabia unilaterally reducing it by 1 million bpd in addition to its OPEC + share. The cuts have been effective, as they are usually production cuts, reducing global crude stocks.
As a result of these events, more people started talking about a rebalancing market and the possibility of oil shortages, which would have been a ridiculous idea just a year ago. But expectations of a narrower oil market have been strong and have pushed up oil prices. More recently, the benchmark contracts also gained momentum from a series of attacks by Yemeni Youtite rebels against Saudi oil infrastructure.
Earlier this week, Brent crude surpassed $ 70 for the first time in 14 months, according to the Financial Times, albeit briefly, shortly after the media reported the attacks. Although Riyadh said there was no serious damage or 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 , raising the price.
Related video: Can the Saudis defend Aramco from the Houthis?
According to John Kemp of Reuters, institutional traders have been selling oil for the past two weeks. Part of this was motivated by profit-taking, and others was the result of betting on a future drop in prices. Still, profit-taking has been moderate: Kemp reports that the funds sold a total of 20 million barrels among the six futures and most traded options on oil and oil production. This compares to a weekly purchase rate of 36.53 million barrels over the previous 15 weeks.
However, the latest reports on oil price movements suggest that this particular rise in prices will not be lasting. Prices have already fallen after hitting several-month highs, pressured by a stronger US dollar and the fact that the Houthi attack on Aramco’s infrastructure did not affect production.
The green dollar jumped this week after the Senate granted preliminary approval to the $ 1.9 trillion stimulus bill proposed by President Joe Biden and final approval is expected this week, possibly as early as today. The stimulus package is one of the factors that analysts have pointed out as crucial to the recovery of oil demand in the world’s largest consumer.
This package, along with OPEC + cuts, could hypothetically raise prices even closer to the $ 80 per barrel that Saudi Arabia needs to balance its budget, but for now it’s just a hypothetical possibility. While the oil cartel has curbed competition from American shale producers in the midst of the pandemic, and although shale producers themselves have been careful not to jump directly into production growth, this may change. with prices over $ 70 a barrel.
“Crude’s rise was a sudden reaction to a shocking OPEC + decision,” Vandana Hari, founder of Vanda Insights, told Bloomberg earlier this week. Still, “the kingdom could be throwing luck if it pursues the hawkish path for too long.”
Front winds are also kept out of OPEC + and shale drills. 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 variants of coronavirus infection. In Europe, new variants are marching across countries, raising infection rates again. This increases uncertainty in the outlook for oil demand and, in turn, uncertainty leads to greater price volatility. The message remains “Wait for the unexpected.”
By Irina Slav for Oilprice.com
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