- Oil to remain stable above $50
- Saudi Arabia cuts to provide strong support
- Chinese covid-19 numbers a cause for concern
After a sustained price ascent from December 2020 through the first week of 2020, oil seems to have run out of steam.
The recent price rally had seen oil rise by as much as 45% since October 2020. The initial momentum provided by coronavirus vaccine breakthroughs got a major boost from Saudi Arabia’s news of impending cuts.
However, recent developments in China and the United States have triggered a lull in the price surge.
Saudi Oil Cuts
The surprise announcement by Saudi Arabia to cut output by 1 million barrels per day has provided a strong support for a price surge. The announcement formed a strong basis for Goldman Sachs to forecast oil to hit $65 per barrel as early as the summer of 2021. The investment bank had earlier estimated that the price would be reached by the end of the year.
Ongoing commitments by OPEC+ will likely keep crude prices above the $50 mark until the next Joint Ministerial Monitoring Committee (JMMC) meeting on 3rd February.
U.S. crude oil stockpiles fell for a sixth straight week, with the latest data showing 3.246 million barrels against a forecast of 2.266 million barrels, thus diminishing prospects of a glut in the coming weeks.
The prevailing oil prices may have to contend with an expected increase in US shale production as producers seek to reap the benefits of improved market prices. The latest oil rig count Baker Hughes US oil rig count shows that there was an increase in the number of oil rigs by 13 to 287.
However, fears over the impact of the incoming Biden administration on oil drilling appear overstretched. The latest data shows that the Trump administration issued a decade-high 4,700+ drilling permits in 2020.
The last time such a number of approvals were issued, oil was trading at $100 per barrel. Despite oil currently trading at roughly half that price, major companies have been keen to acquire enough permits to last them through Biden’s first term.
China and Covid-19
The coronavirus remains a key determinant of global economy and may dictate oil consumption at least until ongoing vaccines become a worldwide success.
A combination of a new virus strain and a rising virus count in China continue to exert pressure on oil prices amid renewed fears of a possible slowdown in economic activity. China, the world’s largest oil importer has seen the virus toll rise to a ten-month high.
Going by its past handling of the pandemic, the possibility of new lockdowns and travel restrictions in China are not far-fetched. This will likely keep the prices trading sideways for the remainder of January.
The latest GDP data release shows that China’s economy grew by 2.3% in 2020, surpassing most analysts’ expectations of 2%. However, this was the smallest growth for the Chinese economy in four decades, underlining the great impact of covid-19. A resurgence of the virus could therefore have an impact on the economy.
The daily chart shows that the Brent crude oil has pared-back some of its gains recently. At the time of writing, it is trading at $55, which is slightly below the YTD high of $57.26. It is also slightly below the Fibonacci retracement. Still, it remains above the 15-day and 25-day exponential moving averages. Therefore, in the near term, the bull run will continue but I expect some resistance when it hits $60. In fact, there is a possibility that it will drop back to below $50 if this happens.