Crude Oil Rally Slows as Fundamentals Play Catch-Up

On Thursday crude oil’s longest winning streak in two years has started to show signs of pausing, thereby allowing fundamentals to catch up with a rally that has taken prices higher by 22% since Saudi Arabia announced their unilateral production cut decision in early January.

A decision that undoubtedly has helped the market through what otherwise would have been some challenging months, with billion of consumers still facing lockdowns and reduced mobility. Tightening market conditions driving rising roll yields, however, continue to support “paper” demand from funds buying commodities as a hedge against the risk of rising inflation.

Crude oil’s longest winning streak in two years continues despite emerging signs of the rally beginning to show signs of overheating. The cost of a barrel of crude has now risen by an impressive 64% since early November when vaccine news helped turn the focus towards the recovery while President Biden’s stimulus plans have helped turbocharged inflation expectations, and with that demand for hedges through commodities.

In addition, the rise by nearly one-quarter since January 4, when Saudi Arabia announced its unilateral production cut for February and March, has increasingly removed barrels from the market, thereby creating the tightest conditions in more than a year. While billions of people around the world remain impacted by lockdowns and lower mobility, Asian demand, led by China, has been strong.

WTI crude oil has returned to the old consolidation area between $50 and $65, an area that supported rising US oil production to 13 million b/d before collapsing to the current 11 million. The US Energy Information Administration in their latest Short-term Energy Outlook wrote: “Although oil-directed drilling has increased in the United States in recent months, the number of active drilling rigs remains lower than year-ago levels.

EIA expects production from newly drilled wells will be more than offset by declining production rates at existing wells in the first half of 2021”. As a result they see no pick up in US oil production from the current 11 million b/d in 2021. For 2022 they see oil production only rise to 11.5 million b/d, a level that would leave plenty of room for OPEC+ to increase production and attract market share as global demand starts to recover.

Crude Oil Rally Slows as Fundamentals Play Catch-Up via @marketinvestor
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