WTI crude almost reached a price of $60 a barrel in trading on Friday. This is the highest price for black gold in a year. That’s exactly when the story of the coronavirus pandemic spilled over from China into Europe. The situation is getting more interesting by the day.
Why did the value of oil plummet last winter/spring? Countries closed their borders and entrepreneurs closed production, restaurants, hotels. Airlines drastically reduced the number of flights. And stocks of oil and petroleum products rose at a rapid pace.
Why is oil rising now? The idea is the same as we have written about many times before. The coronavirus pandemic is expected to end by the end of 2021. And as early as this summer, life will return to what it was before the epidemic in many countries around the world. The first of these countries will, of course, be Israel, which will soon be vaccinating virtually its entire population. This means it will be able to open its borders and remove all restrictions on business.
Against this background, speculators and investors are predicting a rapid increase in demand for oil. That means pushing up the price of oil futures contracts.
What’s wrong with that logic?
The first problem is that absolute demand may never rise to the level it was before the COVID-19 pandemic. We have dealt with this issue in detail. On the one hand there is the abandonment of a huge number of events, meetings and conferences which previously required flying. It turns out that everything can be done perfectly well online. On the other hand, the green and alternative economies are coming on top of the oil companies. And at the forefront of it is Elon Musk, who aims to eradicate petrol-powered cars from metropolitan areas altogether.
The second problem is more real and dangerous for the price of oil and the oil companies. The absurdity is that the oil companies themselves are to blame. They are now selling futures contracts in huge numbers against future oil supplies, at prices they are comfortable with. And other oil companies, producing shale oil, are ramping up production by selling those very futures again.
How will it all end?
Most likely by the fact that a price of $60 a barrel of black gold will be a medium-term high for the next few years. Of course, speculators will try to push prices much higher, towards $70 and even $80 a barrel. After all, oil went to -$37 last spring. Whether the speculators will succeed, we do not know. But if it happens, then there will be a powerful pullback with closing of long positions by stops.
As Senator Cato used to say at the end of his speeches, “Yes, and more! Carthage must be destroyed!
So say we, too, with our two decades of experience in trading – Yes, and one more thing! Never try to guess the bottom or the top in the oil market by trading with your leverages.
00.59 Japan’s Q4 GDP
11.00 EU industrial production for December
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