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The price of oil dropped 13% on Friday (26/11/21), marking the commodities worst single day in 2021.

A drop in oil prices this large was last seen in January/February 2020, when WTI was making its way down to unprecedented negative per barrel territory. No one expects oil to veer this low again, but the comparison to 2020 is apt, with Coronavirus responsible for the commodity's downfall on both occasions.

price of oil

New Coronavirus variant discovered in South Africa

An effort to lower the price of oil had begun before the new Coronavirus strain, named the Omicron variant, appeared.

Led by the US, a strategic release of Oil reserves was being enacted or considered by members of the International Energy Alliance (IEA) in an attempt to lower the price of oil, which they saw as hampering their respective economic recoveries.

It has been claimed that the strategic release would have little effect on the oil price, as the quantity to be released is half of the world's daily consumption. Yet, oil has fallen from its 2021 highs of US ~$85 per barrel since the announcement.

In response, OPEC+ was said to be reconsidering its plan output increase to counter the strategic reserve release by the US and its IEA allies. The OPEC+ rumours helped plug some of the losses oil was experiencing, but not enough to stop consistent weekly losses in the commodity's price. By Friday, oil had rung up five weeks of straight price decreases.

Is the Omicron threat overshooting the fair price of oil?

The Omicron variant is possibly the worst coronavirus variant known, as reported by the BBC. However, uncertainty exists as to how vaccine resistant, virulent, and deadly the strain is compared to its predecessors. As such, countries quickly moved to restrict travel from South Africa, reminiscent of January/February 2020, when international travel came to a screeching halt, and the price of oil fell from US $63 per barrel to sub-zero.

Countries that have placed travel restrictions on South Africa (and other African nations) include the US, the UK, and Germany.

As of writing, WTI is trading at US $68.16 per barrel, as mentioned above, 13% lower than Thursday's price.

Two questions come to mind:

  1. Has the market reacted too severely to the threat posed by Omicron?
  2. Can the strategic release of oil by IEA nations now be halted or pared back?

Regarding the former, Goldman notes that Omicron should have only warranted a ~6.5% drop in the price of oil and that the commodity should quickly recoup some of Friday's dip.

Regarding the latter, it might not be too late to turn this tap off. IEA nations have pledged to release as much as 80 million barrels of oil, with 50 million of these barrels coming from the US. However, a genuine commitment from IEA members has yet to be agreed upon, with discussions still underway as of Friday.

Natural Gas

Traders that have taken a long position on Natural Gas will have been feeling lighter than air for the better part of 2021. Remarkably, the trading price of Natural Gas has rocketed up 115% since the beginning of the year, outperforming price increases in other commodities currently sitting close to record highs, Oats (up by 63.83% YTD), Copper (up by 19.65% YTD), and steel (up by 38.27% YTD). As of writing, Natural Gas is trading at $5.592 per million British thermal units, a thirteen year high for the commodity.

Natural Gas

 

What Is The Reason For The Meteoric Rise In Natural Gas

An unusually scorching 2021 summer in the US drove demand for air conditioning and Natural Gas beyond normal levels, resulting in a lower stockpile of the commodity for an unusually cold winter. Following this, extreme weather conditions, such as Hurricane Ida, interrupted Natural Gas extraction in the Gulf of Mexico's most productive zone.

Will The Price Of Natural Gas Recede?

Typically, when the price of a commodity rises, new investment will enter the market to scoop up the high prices. Regarding Natural Gas, the new investment could be from gas companies lifting output at existing gas wells or exploring new wells that will raise production. Counter-productively, the new investment and resulting lift in gas supply would help suppress the price rises in the commodity.

Natural Gas

New investment in Natural Gas has stalled as of late. While fossil fuels will still be needed for a long time, so-called 'Zero Carbon' policies from governing bodies worldwide are disincentivising Natural Gas exploration. The long-term prospects of Natural Gas wells are less certain and less attractive when contending with the likes of the Biden Administration throwing its full support behind renewable energy sources as the US engages in a wide-scale upgrade to its infrastructure. One project for the Biden Administration is for the US electric grid to be powered by 50% solar within the next thirty years. Achieving this goal would severely squeeze demand for Natural Gas, which, according to the EPA, generated approximately 40% of the country's electricity in 2020.

Natural Gas Technical Price Analysis

In this video, Philip looks at possible trading zones to eye for future movements in the commodity.