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.
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.
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:
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.
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 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.”
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.
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 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 broke a critical fundamental level of $57 a barrel, a psychological resistance that may see Brent continue to price pre-Coronavirus levels.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Is this the beginning of the end? The UK announced yesterday that they have provisionally approved Pfizer’s Coronavirus vaccine. This makes the UK the first country to approve a vaccine, which they state will be available to individual members of the public by next week.
Simon Steve, Chief Executive of the NHS, stated that the bulk of the vaccinations would occur between January and April next year. The Medicines and Healthcare Regulatory Agency (MHRA), the governing body for the UK which is responsible for ensuring medicines and vaccines are acceptably safe, stated that they volowed “an extremely thorough and scientifically rigorous review of all the evidence” and that “the public can be absolutely confident that the standards we have worked to, are equivalent to those around the world.”
The UK framework allows vaccines to be approved while reviewing the data given to them on a rolling basis, which is why it was approved earlier in the UK. This is compared to the United States, which requires a public review and full scrutinization of all the data available. The British Government has secured 357 Million allocations of seven separate vaccines.
The S&P 500 and the NASDAQ were able to squeeze their way to new all-time highs. However, the real winner was oil – reaching $48.40c for a barrel of Brent Crude. It’s edging to break the strong psychological barrier of $50.
The Vaccine has provided a needed boost to the Black Gold. With OPEC+ coming close to a deal, we may see oil breach that $50 mark if OPEC decides to continue the supply cuts.
John Kilduff, a partner at Again Capital LLC, stated that “it looks like there is headway being made, which the [oil] market is looking for.” With the said, US Oil Inventories this week fell lower than what analysts were expecting, with a drop of 754,000, well shy of market estimates of 2.3 Million.
GBP/USD was surprisingly stable, maintaining that 1.337 level. However, EUR/USD blew past that 1.20 mark, currently sitting at 1.21.
Are you going to take the Vaccine when it's available?
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.
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.
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.
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.
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.
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.
It is no surprise that Oil has had a rough couple of patches this year, with the Coronavirus shattering oil demand. What will it take for Oil to push back past $45?
There has only been a couple of times where Oil has made strong moves to the upside, notably today and a couple of weeks ago when hurricanes approached the Gulf coast, forcing oil rigs to shut down and restricting supply. Any good demand hopes have been thwarted by what people can see with their eyes. Sure, investors and traders and see oil inventories are declining. However, they can still see the Coronavirus weighing down on demand.
More importantly, the election is more or less a week away, and one of the markets that will get scrutinized the most is Oil. It's the common opinion that if Trump is re-elected, Oil and the initial price movement would most likely be to the upside. However, if Biden is elected, this would be bad for Oil, and the initial price movement would be to the downside. However, is that the case?
Financial Times did an excellent summary of what the future holds for Oil if either candidate gets in.
· Fixing the Iran Nuclear deal, freeing up more barrels of Oil from Opec members for export (i.e., an increase in supply)
· A $2 Trillion push for renewable energy and infrastructure to reach 'net zero' emissions by 2050
· Ban on Fracking on federal land
· Proposed new drilling limits on Fracking
· Withdrawal from Paris Climate Agreement
· Supports de-regulation for the fossil fuel industry
· Close relationship with Saudi Arabia
The consensus on the street is that Oil will fall on a Biden win. Amrita Sen from Energy Aspects stated that "[the market] is going to focus on Iran, so a Biden win is bearish for oil prices immediately". Furthermore, Amy Jaffe, an energy policy expert and professor at Tufts University, stated that "A Biden victory will be a shot in the arm for oil competitors, putting the federal government's weight behind the energy transitions and low-carbon technologies".
However, a Biden win is the least of Oil's problems. As Amy put it, "Tougher milage don't mean much if people cant afford a new car."
In the longer term, how will Oil fair with a Biden presidency? A push to greener energy sources would restrict the use of fossil fuels. The Biden presidency may do this by limiting further exploration of deposits / making it more expensive. This increases the cost of research and development, in which buyers will ultimately have to pay the price through an increase in oil prices.
This would make the opportunity cost of using greener, more expensive energy alternatives like solar. However, there will be a point where greener energy investment alongside increasing fossil fuel prices will make the greener alternative more desirable. Sure, oil prices will be relatively higher – however, demand will slowly plateau.
Bob Mcnally, a former adviser to US President George W Bush and analyst at Rapidan Energy that a Biden win may see a boost in crude in the long term on the idea that Biden "will push for a policy that prohibits / limits exploration for new oil."
A Trump win should see a practical trajectory for Oil. An initial upside on his victory, with support for Fracking alongside the delaying for the impasse of greener energy and Oil, talked about above.
Are you looking at Oil?
Markets today bounced back as stimulus talks have come back into question. The NASDAQ is up around 0.7%, while the S&P 500 and the Dow Jones were up 0.8% and 0.43%, respectively.
This is after the Market's fell around 1.4% a couple of days ago on Trump's tweet, stating that he has entirely stopped stimulus talks, saying Nancy Pelosi has been negotiating in "bad faith." However, Trump has slowly come back on the statement, as Trump allies believe it may have created the political risk he'd be blamed entirely for the economic fallout. He told Fox Business that he has reinstated talks about a stimulus bill and is now "starting to work out." "We started talking, and we're talking about airlines and we're talking about a bigger deal than airlines. We're talking about a deal with $1,200 per person, we're talking about other things."
The contested stimulus bill was between the Democrat's $2.4 Trillion dollar proposal versus the Republican's $1.6 Trillion dollar proposal. The Democrats have countered with $2.2 Trillion. However, the white house has not provided a counteroffer to that proposal. Nancy Pelosi is also pressing for language in the bill to limit Trump's ability to deliver virus testing and treatment funds to other projects.
Furthermore, we saw Brent Crude and WTI rise around 3.3% as energy companies on the Gulf coast evacuated 183 offshore oil platforms and halted nearly 1.5 million barrels per day as a safety precaution to Hurricane Delta. WTI and Brent are hovering around $41.25 and $43.32, respectively.
In the European markets, we saw the EUR/USD sell-off after ECB officials signaled that they were ready to ensure inflation moved towards their mandate, including slashing their already negatives rates and broadening their Targeted Longer-Term Refinancing Operations (TLTRO's), which stimulates banks to lend. EUR/USD is down around 0.2%.
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 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.
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.
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?