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Is the recovery of the oil market ahead of the fundamentals?




Endless hope that a new round of US stimulus will magically bring life back to normal and push prices up for longer suggests the market is detached from the reality of high unemployment and a still weak economy.

Frigid temperatures in the shale zone added to the recent recovery, as U.S. oil production fell by nearly 4 million barrels per day. But warm weather is coming to Texas – this week in fact – and prices fell below $ 60 a barrel on Friday after hitting $ 61 midweek.

Fundamentals suggest the market is getting ahead of itself, as it did in the second half of 2019, when prices climbed to $ 75 a barrel before plummeting to around $ 40. To put the economic recovery in perspective, there were 4.5 million people in the United States without jobs in the last week of January, up from 1.6 million during the same period in 2020.

Crude oil prices, however, are about 10% higher than they were at this point last year, when the novel coronavirus causing the deadly COVID-19 was only making headlines. newspapers. Since then, around 2.4 million people have died worldwide from complications from COVID-19.

Yet, to hear from energy policymakers, the situation has sort of returned to normal. Russian Deputy Prime Minister Alexander Novak, a member of the joint committee to monitor market conditions for producers operating under the OPEC + umbrella, said last weekend that the price reflected a balanced market.

It may be true. Russia and Saudi Arabia are the de facto leaders of the 20 or so producers who have agreed to cut crude production to avoid another collapse in oil prices.

In addition to the deal, Saudi Arabia cut production by another million barrels per day, hoping to keep the price of oil at a level favorable to producer economies.

But economists from the Organization of the Petroleum Exporting Countries noted that the negative economic impact of social restrictions aimed at controlling the pandemic is expected to persist at least until the first quarter of the year.

And a strong rebound in oil demand is not likely until the second half of 2021.

Hope over experience

The voluntary restriction of production to some extent matched weaker demand, supporting the recovery of raw materials.

Bob McNally, chairman of the Rapidan Energy Group, a Washington-based consulting firm, however, said the rally appeared to break away from what fundamentals would otherwise support.

“We, like most barrel counters, expect the inventory draws and Saudi Arabia’s unexpected voluntary decline to support prices,” he said. “But the point of view here is that the rise in crude prices has decoupled from the fundamentals of supply and demand and reflects the positioning of investors (for a strong recovery) driven by vaccinations, stimulus measures fiscal policy and a torrent of central bank liquidity.

In the United States, the acquittal of former President Donald Trump for inciting insurgency on January 6 paves the way for the Biden administration to move forward with a $ 1.9 billion stimulus package. dollars.

While the consensus among economists is that the massive spending plan is needed to accelerate a recovery, some, including former Treasury Secretary Larry Summers, have warned that it risks boosting inflation.

While headline inflation remains low, energy prices have risen rapidly. For gasoline, inflation fell from 0.5% in November to 7.4% last month.

This should be detrimental to continued demand growth, which in turn could stifle the rally, analysts said. The national average retail price for a gallon of regular unleaded gasoline was $ 2.50 for Monday, a 2.5 percent increase from the same period last year, according to AAA.

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