While stock markets are in waiting mode for Biden’s statements on the economic support package, it is worth taking a look at the commodities market. The oil market has been rising for quite some time. Will a rise in coronavirus disease give the bears a chance?
For several months, oil continued to renew its highs. All was going well enough until a new, more contagious strain of COVID-19 emerged. Everyone remembers well how after the first wave of infection and the closure of countries to quarantine around the world, oil prices dropped precipitously. Now the situation remains questionable in China, where a rise in the disease has been recorded in Hebei province. China is a major energy importer and if it has a problem, it will automatically affect the price of energy.
In 2021 the price of WTI oil rose by more than 10%. Quite an impressive growth in the current difficult economic and epidemic situation. One of the growth drivers was Saudi Arabia’s announcement to reduce oil production by more than 1 million bpd.
Fuel consumption data from America is also worth a closer look. Gasoline demand has fallen to some of its lowest levels since the COVID-19 pandemic and distillate stocks continue to rise.
Finally, the US dollar, in which contracts are traded, has a direct role in the price of a barrel of oil. When the US dollar weakens, the price of oil rises, as it allows the contract to be concluded at a better price for the buyer. Over the last few months, the dollar has weakened significantly against other world currencies and this trend is likely to continue. Joe Biden’s economic stimulus plans will be known by the end of this week and they will have a direct influence on the USD’s exchange rate against other currencies.
The bottom line is that at this stage, the price of WTI oil is at a level where it will balance, considering all the factors mentioned above. There are no clear advantages for both bulls and bears. Still, a lot will depend on oil demand in China. In the first wave of the pandemic it almost single-handedly pulled the oil price out of a prolonged dive.
In the short term, it is more likely that the price initiative will be on the buyers’ side. The price might try to come down to the $55/barrel level. We wait for Biden’s programme and only after that do we draw conclusions.
What are we waiting for today?
8.00 German GDP for the quarter
13.30 ECB Monetary Policy Statement
14.30 U.S. initial jobless claims
18.30 Address by Mr Powell, Head of US Federal Reserve System
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