Are the oil markets seeing something we don’t?
Are the oil markets seeing something we don’t?
Oil is currently hovering at two-month highs. Brent, the global benchmark of Oil, now sits comfortably above $44 a barrel, approaching a strong resistance area of $45 and $46 a barrel.
Oil has retested this resistance level multiple times in the past couple of months, with price rejecting the area firmly due to weak fundamentals.
Oil and it’s past weak fundamental’s are strong compared to current fundamentals
However, the “weak fundamentals” were during the holiday season in both Europe and the United States, where lockdown restrictions were lifted due to governments thinking that they had put the Coronavirus behind them. Under these conditions, with restricted supply from OPEC, Oil was still unable to break that $45-$46 barriers.
What chance does it have of breaking that resistance area now? Arguably, the fundamental environment oil sits in is worse now than it was a couple of months ago. Currently, Coronavirus cases in the United States’ look like it has no intention of stopping, with new cases topping 140,000 yesterday. For reference, cases the day before we’re 130,000
Furthermore, the supply of Oil is set to increase, with Libya is set to ramp oil output from 500,000 – 1m Barrels per day. Libya is not part of the OPEC Organizations.
Price action has been fueled by optimism that the Pfizer vaccine with 90% efficacy will arrive before the year-end. If this happens, risk-on will continue and will be enough to send Oil past the $45 – $46 resistance area.
Oil and it’s success hinges on a vaccine
However, if there is any doubt about this vaccine’s release, this will hit that resistance like a brick and may throw it straight back down to $40 levels. Furthermore, with Biden being President-Elect promising to enact $2 Trillion fight against climate change, the opportunity cost for using Oil will slowly taper off. Policies include restricting oil drilling on public lands and waters, increasing federal mileage standards for vehicles, block pipelines that transport fossil fuels across the country, and providing incentives to develop renewable energy.
Currently, it looks like Oil may be aiming for the 23.6% level at around $43.70 to retest for a move higher on positive news regarding a vaccine. However, worsening Coronavirus conditions and further delays on a vaccine may see Oil fall below this level to retest the 50% retracement level, at around $41.1 a barrel.
Oil’s catalyst hinges on a vaccine. If your research suggests a vaccine is possible before year-end, Oil may be a fair trade to the upside.
If there is a time for a currency to be relatively weak, it’s during recessionary periods. A stronger currency entails a rougher time for goods and services to be exported out of the country as those exports are more expensive due to the stronger currency.
We have a relatively light data week ahead regarding the amount of significant data points coming out. However, the economic events are extremely significant in determining the state of their respective economies. Hope you all are staying safe. Here is your week ahead.
In 2020, Silver had a legendary rise from its low during the peak of the Coronavirus lockdowns in March – up over 140%. Analysts (including me) attempted to justify its price and separate its strong correlation with Gold by arguing that Biden’s climate change policies will boost Solar Panels’ use, which extensively uses Silver. This may be a catalyst in the longer term.
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