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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.

Crude Oil This Week: Up, Down, Sideways?

Set your predictions for where Crude Oil is heading this week. Everything is on the table.

The past week’s trading of Oil was definitely affected by the infamous Ever Given ship obstructing the Suez Canal. Crude indices swung back up in price once the ship was dislodged from the canal’s bank. Passage through the channel is possible again, and the 350 boats moving US$9 billion worth of global trade per day have resumed their journeys.

While Oil has had an upswing, volatility is still very much present in the market. With the Evergreen difficulty receding, the market moves its attention to the upcoming OPEC+ meeting this Thursday.

OPEC members are expected to keep oil supply at its current low level or even lower production. The member states are anticipating lower oil demand from Europe as a fourth wave sweeps through the continent. Saudi Arabia will be looking to flex its membership muscle and restrict oil supply and possibly pump the price up a little.

WTI crude oil 1 hour fib

The 1 Hour chart on WTI Crude shows prices being well supported by the 38.2% fib level at $61.29, with near term resistance at $62 a barrel. With the OPEC meeting looming, investors could see an opportunity to target the 50% mean reversion at $62.539.

As of writing, WTI crude is sitting at US$61.53, Brent Crude is US$64.96, and the OPEC Basket is US$62.56.

Markets are Frothy

Here's an interesting juxtaposition. There are currently just over 25 Million Currently Infected Patients of Covid-19, with 2.4 million deaths*. However,

The point is, main street continues to grapple with the Coronavirus. However, if you were looking at the financial markets, you would've thought we were in one of the largest economic expansions in history.

Warren Buffet's favourite indicator is signalling mania

So much so, Warren Buffet's favourite indicator is flashing signs of mania. Currently, the U.S equity market cap is more than double the GDP of the United States. The last time this happened was during the bubble of the 2000s.

That is a long, convoluted, and somewhat poor segue to the main point of this article. A lot has happened in the past couple of days, with many asset classes at significant highs during one of the worst pandemics in history – here's an article to summarize them.

Pound Has Broken 1.39 Against The U.S Dollar

GBP/USD breaks 1.39, eyeing up 1.40 and beyond

As vaccinations pick up in the United Kingdom, alongside lockdown restrictions starting to show results in lower cases and deaths, investors have been flocking the pound as optimism for the United Kingdom's economy. It is important to note that 1.45 was the bid before Brexit was announced in 2015, making it a ripe target for bulls to take.

United Kingdom's decision not to join the European Union's vaccine effort has helped them attain a high vaccination distribution rate
Cases are way down from all-time highs

Vaccines have played a considerable part in the strengthening in confidence in the United Kingdom, helped by the fact that they did not join the European Union's vaccine effort. This enabled them to approve and administer vaccines at a faster rate than their European counterparts.

Brent Crude is at $63 a barrel

Nearing the same time last year, we had an unprecedented event occur – traders saw the price of WTI Crude Oil on their terminals go negative. A year of supply cuts, recovering demand, and recently a rise in tensions in the middle east has pushed the black Gold back to pre-pandemic levels.

Bitcoin flirting with $50,000

Bitcoin's volatility is less than it was in 2017, making its insane rise in value less intimidating

After an influx of institutional attention dawning upon the digital currency, including the likes from Mastercard, JP Morgan, Morgan Stanley, and of course, Tesla, Bitcoin has reunited with bulls taking the price up to just under $50,000 per Bitcoin. To note, Around the end of November last year, we saw Bitcoin at around $20,000.

Stocks are at all-time highs

S&P 500 at all time highs

The S&P 500 has closed at an all-time high, touching 3,950 in futures trading. The index is up 7% year to date. If we lived in an ordinary world, all-time highs in the equity markets would be the headline of the day.

However, it seems like stocks are too boring nowadays, and everyone wants to know which altcoin is next to return 1000x. However, many companies in the index are producing blowout or at least better than expected earnings. Considering the macro-environment we are currently living in, is quite an achievement.

Gold doing its job as a safe-haven asset

I had concerns about the notion that investors were considering Gold's valuation – not something you want to be talked about in a safe-haven asset. I believe a safe-haven asset should be there to ballast your portfolio in times of risk-off periods, meaning investors should be able to flock to it / rely on it to hold their portfolio in steady shape.

Gold's steady decline eases my concerns, with Gold trading at around $1,816 an ounce, way off its $2,000 highs. We can see a continuation of the trend should see prices around the $1,700 - $1,750 level.

Markets are frothy – stay safe, and trade safe.

*For you tinfoil hats-wearers out there, I will entertain you by including the fact that there are up to 650,000 deaths due to the flu each year. Take that what you will

Crypto, Oil & Stocks Hit All-Time Highs

The headline says it all – market euphoria has reached an all-time high. However, given the events that have occurred in 2020, it feels like it is just another day at the office. For the most part, it is.

Bitcoin Reaches All-Time Highs

Bitcoin Licking $44,000

Bitcoin reached an all-time high earlier in the U.S Trading session, touching $43,000. This is primarily due to Tesla CEO, Elon Musk, revealing in an SEC filing that they had purchased over $1.5 Billion in Bitcoin in January.

They stated that they invested “To further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity” - or in other words, a bet on Bitcoin using cash not required to run the business. They also stated that they “expect to begin accepting bitcoin as a form of payment for our products in the near future.”

Musk x Dogecoin - All-Time Highs

Elon Musk Continues To Talk About Dogecoin
Elon Tweeted This Photo About Dogecoin

This interest in cryptocurrencies does not just stick to Bitcoin. The meme currency Dogecoin has returned to all-time high levels at around 8 cents after many celebrities like Snoop Dog and, of course, Elon Musk, continue to talk about the currency.

Like I wrote in my previous article, it was relatively common for people to hold hundreds of thousands, if not millions, of Dogecoins in 2014. Assuming those people held them till now, we would have miners and investors with life-changing wealth – all from a meme currency.

Oil Back At Pre-Pandemic Levels

Brent Crude Back To Pre-Pandemic Levels

In the commodity markets, Oil has made a legendary comeback. Brent Crude topped $60 as vaccines, and unexpected Saudi cuts have made tailwinds for the Black Gold.

However, some analysts are concerned about the quick rise in price, stating that further tension between Russia and Saudi may ensue due to the higher prices. The last time Russia was not on board with OPEC, prices plummeted below $30 a barrel. Brent currently sits at around $60.60 a barrel.

Equity Markets At All-Time High

S&P 500 In Orange, NASDAQ in Blue, Dow Jones in Teal - All Positive Year-to-Date

Equity markets saw a breath of fresh air, with the Dow Jones, S&P 500, and the NASDAQ up over 0.4%. Stimulus positivity, alongside vaccination numbers, boost the possibility of a strong fiscal 2021.

John Stoltzfus, Chief Investment Strategist at Oppenheimer, stated, “as people feel safer, investors can expect the economy to experience a rebound that should contribute to revenue and earnings growth as the economy reflates.”

At such inflated valuations in many asset classes, investors and traders should be ready for a sudden pullback on any negative sentiment.

Brent Crude Oil Reaches Yearly Highs

Brent Crude broke a critical fundamental level of $57 a barrel, a psychological resistance that may see Brent continue to price pre-Coronavirus levels.

Brent Crude Oil Bulls Looking for $58

This is likely on the news that more Americans have received at least one dose of a Coronavirus vaccine than having tested positive for the virus. The United States has been administering vaccines to citizens faster than any other country, with Bloomberg estimating the administration rate at around 1.34 Million doses a day.

Oil Supply Side Providing Headwinds, Complementing Demand Strength

With the demand side of Oil improving exponentially, OPEC has started to increase crude supply by 300,000 barrels to the market in January – showing their confidence in oil prices' stability now and going forward. However, disruptions and African nations Nigeria and Libya have slightly offset the supply hike, with a leak in a fundamental pipeline in Libya alongside a suspension in deliveries in Nigeria pulling away around 110,000 barrels of supply off the market.

Brent Crude Oil Timespread

With Brent Crudes futures month's spreads trading at the highest backwardation in a year, alongside Royal Dutch Shell Plc purchasing the most benchmark-grade cargoes in a single day in 10 years, the physical and financial markets are showing supply tightness and demand for the Crude Oil.

Analysts Are Tentatively Positive on Oil Markets

Ole Hansen, head of commodities research at Saxo Bank A/S, stated that currently, the oil market is "supported by the combination of tightening fundamentals, as seen through the rising backwardation and the renewed risk appetite in the U.S stock market.

Other analysts share this perspective, with Bill O'Grady, Executive Vice President at Confluence Investment Management, stating that "the market is going to see supply contract, assuming OPEC doesn't immediately move to fill the gap."  Furthermore, Goldman Sachs' commodity analysts estimate of 500,000 a day restriction on supply has been greatly surpassed, with the average supply deficit ranging at around the 900,000 barrels a day mark.

Oil's financial price comes from physical pressures

It is important to note that with commodities and other hard asset such as Silver and Gold – the futures market may say one thing. Ultimately, however, it is what happens in the physical market that sets the final price. And in this case, the physical market for Oil is more robust than it was at the peak of the pandemic. Pair that with positive sentiment regarding the vaccine rollouts around the world and a continuation of a supply restriction by OPEC+, and you have a breeding ground for Oil to move higher.

Oil markets seeing a brighter future

24th February 2020 was when the last time we saw oil hovering around the $55.80 mark. The Oil markets were hammered in 2020, taking investors and traders back to their economics 101 classes.

However, unlike traditional markets, the Oil markets have something traditional markets do not – controlled supply.

24th February 2020 was when Brent was last at this price level

OPEC+ controlling the supply of Oil

OPEC+, a 24- country cartel, took drastic measures as of late to control the drop in oil price by restricting supply. The most recent supply cut by 1 million barrels a day by Saudi Arabia has pushed Oil markets to levels not seen since 24th February last year. Saudi's unexpected move was on the back of the OPEC+ decision to gradually bring back supply to the market in January.

However, the de-facto leader claims the Oil market throne

The Energy Minister of the Oil-dependent country, Prince Abdulaziz bin Salman stated that "[Saudi Arabia] are the guardian of the [Oil] industry", showing their influence in the Oil markets.

Oil markets getting bullish recommendations from institutions

Since December, Oil prices have rebounded 18% on the vaccine's slow rollout, peaking at around $56 a barrel. With the rollout of Vaccinations, analysts at Goldman Sachs are becoming bullish on the Black Gold, stating that they predict Brent could rise to $65 a barrel by the summer of this year, bringing the timeline half a year from their previous prediction. However, they stated that "given the magnitude of the recent rally, however, markets are likely to consolidate near-term,"

Given the Coronavirus situation worldwide, the demand situation has not improved to the point where it was on the 24th February, giving the price of oil the characteristic of a forward-looking stock instead of a spot looking commodity.  However, if the vaccine continues to make its way around the world and demand truly starts picking up, we may see the Oil markets return back to a relative norm.

Oil at Fresh highs as demand-side brightens

The oil markets have been seeing the light as of late. Oil prices have reached an eight-month high, with WTI and Brent Crude trading around $45 and $48. This is from the recent positive vaccine news, alongside better than expected EIA data and geopolitical supply-side tensions.

Brent Crude eyeing out $50 a barrel

Oil supply and demand fundamentals are getting brighter

Peter McNally, global head of industrials, materials, and energy at Third Bridge, stated that "it has been a really good run. We haven't seen a run like this since the spring after we went to negative prices." He also stated that "Sentiment has changed pretty quickly… lately it feels like supply and demand fundamentals are heading in the right direction."

Many markets have been revolving around optimism on a vaccine, and Oil is no exception. The Price of Oil has come a long way, from the price war between Saudi and Russia earlier this year, alongside Oil going negative in late April. With the vaccine in sight, the Oil markets are banking on increasing demand in the following months. Bloomberg also reported that Chinese and Indian refiners had issued a large number of tenders seeking crude Oil for loading in Jan, highlighting the strong demand from parts in Asia.

The supply side is also providing pressure for Oil upwards, with the geopolitical tensions rising with recent attacks on a fuel depot in Saudi and an oil tanker in the Red Sea.

Oil rally also causing problems for OPEC

Iraq's fiscal breakeven price for oil

However, the main governing body for the oil markets, OPEC, is having some troubles with their members. Iraq, which requires an oil fiscal break-even price of $64, is voicing their frustrations at OPEC's "one size fits all" policy. Iraq's Finance and Deputy Prime Minister, Ali Alawi, stated that "We have reached the limit of our ability and willingness to accept a policy of one size fits all."

Although they have breached OPEC's quotas many times this year, Iraq is quite influential within OPEC, as they are the largest producer after Saudi Arabia. OPEC is set to renew its policies regarding supply cuts on December 1st.

OPEC is placed in an awkward position, as rising oil prices means it's harder to come to a consensus for the 13 countries on whether they should continue to cut supply to the market, in turn, giving up the opportunity to lock in revenue for years to come.

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.

Brent Crude is fragile

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.

Oil falls on stalling recovery

The largest oil consumers are both the United States and European Union – making up around 34% of the worldwide 100 Million demand (before the Coronavirus). Both Countries / Continents have seen daily increases in their Coronavirus case count. The United States currently has 7.1m Coronavirus cases, while Europe has around 5 million cases. Coincidentally (or not) – this makes up 36% of the total global Coronavirus cases. In other words, the future of the price of oil is heavily influenced by how these two nations handle the Coronavirus. Europe has to deal with individual countries governed by different styles of government to manage the Coronavirus. The United States, unfortunately, has all but given up.

Brent Crude drops 4%

Brent Crude fell as much as 4% as Global risk-on sentiment softens. A resurgence in Coronavirus cases in Europe, alongside a constant double-digit reporting of new cases in the United States, pushed oil down. Oil's struggle to rally comes from weak global fundamentals; therefore, it is quite susceptible to pullbacks. Brent has been trading in a tight range from $40 - $45 a barrel for the past couple of months.

Oil countries struggling

Low oil prices have forced many oil-producing countries to draw into their pockets to continue supporting their country. Most notably, with the lowest production cost of any oil producer at $2.80 per barrel, Saudi Arabia requires oil prices to be at $76 a barrel to achieve a fiscal break even. This has forced Saudi Arabia to triple its value-added tax, cut spending, and suspend the living allowance cost.

Oil trading houses going green

However, the long-term oil trend may not be as bright as OPEC+ may want it to be. Oil trading houses such as Mercuria, Vitol, Trafigura, and Gunvor are investing billions of dollars into renewable energy projects in the coming five years. Marco Dunand, Chief Executive of Mercuria, told the Financial Times that "If you want to exist in 10 years' time and don't want to be in renewables then I think it's going to be tough" and that "Ove the next five years we should have about 50% of our investments into renewables".  However, oil giant BP predicts that developing countries will continue driving oil growth over the next ten years.

What's your viewpoint on oil?

Oil getting a boost from mother nature

Oil has recently gotten a boost in its price from Mother Nature. Tropical Storms Laura and Marco have been gaining in intensity and are approaching hurricane strength, warned the national hurricane center in Florida.

Oil licking $46

They forecast that hurricane Laura is set to strengthen over the Gulf of Mexico, with an increased risk of dangerous storms, wind, and rainfall along portions of the US Gulf Coast. This has forced around half of the oil production in the Gulf of Mexico to halt in precaution for the two hurricanes.

Brent Crude was trading just a tick above $46 a couple of hours ago – however, sits firmly above $45 a barrel, solidifying a closing of the gap left from the $10 drop in oil price when Saudi and Russia announces a price war.

Reminder: Oil is a spot commodity

This highlights something about the oil markets we sometimes forget, and that is the oil is a spot asset. Unlike equities, which discount predicted future earnings, oil does not have the luxury of taking into account earnings, beating analyst estimates, premiums, etc. Oil is directly affected by supply and demand. In this case, supply was cut due to mother nature, therefore pushing oil prices upwards.

However, it will take a lot more for oil to get back to its heydays. Even though OPEC+ and the United States took drastic measures by cutting oil supply by 10.7 Million barrel a day through the peak of the lockdowns, oil demand is still 10% lower than it was in 2019. However, in the United States, we have seen five weeks of net outflows from Crude Oil inventories, which suggest oil demand may be on in the swing of a recovery. However, in my part of the world, I’ve seen fuel prices recover close to levels pre Coronavirus.

US Crude API Inventories have had net outflows for the past 5 weeks

It is interesting to note one of the effects that low oil prices have had on the Market. Once the most valuable company in the world in 2013, Exxon Mobil, an American oil and gas corporation, has been kicked out of the Dow Jones. Exxon was the oldest company in the Dow Jones. Pharmaceutical company Pfizer and Aerospace and defense manufacturer Raytheon Technologies are also seeing the way out, being replaced by Salesforce, Amgen, and Honeywell.