Speculators have been selling oil for the past two weeks as prices continue to rise and hunger for profit-taking grows. How long it will last is a mystery, but it could get more intense this week.
Oil prices started to rise last November when the first news about the safety and efficacy of vaccines emerged. After that, oil prices went through a series of small lows. After that, things have gone largely smoothly since January, thanks to the massive roll-out of vaccinations that are expected to boost demand for oil soon.
In addition to the vaccinations, however, OPEC + continued to limit production, with Saudi Arabia adopting a unilateral cut of 1 million barrels per day in addition to its OPEC + quota. The cuts have been effective as production cuts tend to reduce global crude oil inventories.
As a result of these developments, more people started talking about a rebalancing market and the possibility of an oil shortage – something that would have been a ridiculous idea just a year ago. But expectations of a tighter oil market have been strong and have pushed up oil prices. Recently, benchmark contracts were also boosted by a series of attacks by the Yemeni Houthi rebels on Saudi oil infrastructure.
Earlier this week, Brent oil hit $ 70 for the first time in 14 months, according to the Financial Times, albeit only shortly after the media reported the attacks. Although Riyadh said there was no serious damage and no loss of production as a result of the attack, as always, traders responded to the news of an attack on Saudi oil infrastructure: They started buying oil, driving the price higher.
Related video: Can Saudis defend Aramco against Houthis?
According to Reuters’ John Kemp, institutional traders have been selling oil in the past two weeks. Some of it was motivated by taking a profit, and some was the result of betting on a future price drop. Still, profit-taking was moderate: Kemp reports that funds have sold a total of 20 million barrels across the six most traded futures and options on oil and oil productions. This compares to a weekly purchase rate of 36.53 million barrels over the past 15 weeks.
However, the latest reports on oil price movements suggest that this particular price increase will not be lasting. Prices have already fallen after hitting their multi-month high, under pressure from a stronger US dollar and the fact that the Houthi attack on Aramco’s infrastructure had no impact on production.
The dollar jumped up this week after the Senate provisionally approved 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 to as crucial to the recovery of oil demand from the world’s largest consumer.
That package, along with the OPEC + cuts, could hypothetically push prices even higher – closer to the $ 80 a barrel Saudi Arabia needs to balance its budget – but for now this is only a hypothetical possibility. While the oil cartel threw off competition from US shale producers during the pandemic, and while shale producers themselves have been careful not to jump right back into production growth, this could change with prices above $ 70 a barrel.
“Crude’s peak was a jerky response to a shocking OPEC + decision,” Vandana Hari, founder of Vanda Insights, told Bloomberg earlier this week. Still, “the kingdom could be fortunate if it follows the ragged path for too long.”
Headwinds outside OPEC + and shale drilling machines also remain. In the United States, for example, a number of medical experts have warned states not to ease their movement restrictions amid an increase in new variants of coronavirus infections. In Europe, the new variants are marching through the countries, causing new infection rates to rise again. This increases uncertainty in the outlook for oil demand, and uncertainty in turn leads to increased price volatility. The message continues to be “Expect the Unexpected”.
By Irina Slav for Oilprice.com
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