Oil – a Down and Up Year
It’s been an up and down year for the world’s number one energy source and one of the most traded assets on our platform, oil. Oil has always been known to be one of the most volatile commodities, but this year has without-a-doubt been a unique year. In the first half of the year, the asset decreased by a record of 84%, dropping as far as under $10 per barrel. Since the world’s economies started again reopening in May, oil saw a strong recovery mounting to a whopping 430%.
Oil can be a love or hate relationship with traders as it is extremely volatile and can trade in different directions at times. Therefore, it is important to compare the volatility and price movement against your risk appetite. Earlier on in the year we posted a variety of blogs looking at the asset’s collapse. Now that the asset is seeing prices above $50, let’s look at what is contributing to oil’s recovery including OPEC Negotiations, limited on-supply, and rising demand.
Oil, like most other assets, is priced mainly based on supply and demand. The higher the demand, the lower the supply, the higher the chances of seeing a more expensive price. In order to be well informed on the supply of oil, traders concentrate on comments and meetings between OPEC members.
OPEC is an organisation consisting of 14 of the world’s major oil-exporting nations. OPEC aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries. Countries that belong to OPEC include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (the five founders), plus the United Arab Emirates, Libya, Algeria, Nigeria, and five other countries.
We can see throughout the week that oil prices continue to be in a corrective trend, but have retraced slightly today, trading at 53.40. The recent OPEC+ meeting, at which a decision “satisfactory for everyone” was adopted, the active growth of oil stopped, and the quotes are again affected by the negative fundamental background.
Investors again associate the main concerns about the global demand for oil with China. The country, which has fully returned to 2019 consumption levels, is now facing an outbreak again, and authorities have already advised residents not to leave their homes for a week. The Chinese authorities announced the largest daily increase in patients in the country in the past 5 months and blocked the epicenter of the outbreak; the capital of Hebei Province, Shijiazhuang city with a population of 11 million. A serious new increase in the pandemic in China could negatively affect global production and reduce the demand for petroleum products once again.
Nevertheless, the overall investor sentiment remains positive based on the current indicators in the medium to longer term. It is supported by the intention of Saudi Arabia to reduce oil production by 1 million barrels per day in February and March, as well as the continuation, albeit slow, of vaccination of the population of the leading countries of the world. In addition, Japanese authorities made it clear yesterday that the emergency zone in the capital region in the near future can be significantly expanded, which will lead to even greater blocking of enterprises.
As we can see the level of supply is looking hopeful as long as the OPEC countries continue to commit to their plan to control the level of supply in order to protect prices. However, it is important to also look at the level of demand which has threatened prices vigorously this year. The positive news relates to the beginning of the vaccination campaigns against coronavirus, as well as the stabilization of the Asian market for imports of petroleum products, had a positive effect on quotations, but since the beginning of the year the situation began to worsen.
Even though we are getting positive news from certain regions, at the same time the UK and the Eurozone continue to remain mainly in lockdown. The UK has advised it may remain in lockdown for another 2 months. Lockdowns can have a significant impact on the level of demand and can strain prices into another bearish price trend. In addition, Chancellor Merkel advised in her speech last night that lockdowns in specific regions are likely to continue until April. Though it should be noted that the market remains slightly more positive than negative based on the current level of vaccines administered.
Hopefully the blog has shed some light on the current developments surrounding the politics of oil. As mentioned above, the price of oil remains positive as it attempts to fully correct to pre-COVID prices. The main note is that traders need to concentrate on the level of supply being pumped into the market as well as the demand required by the market.