Never-ending hopes that a new round of U.S. stimulus will magically bring life back to normal and push prices higher for longer suggest that the market is detached from the reality of high unemployment and a still weak economy.
The frigid temperatures in the shale patch added to the recent rally as U.S. oil production fell by as much as 4 million barrels a day. But warm weather is coming to Texas — this week, in fact — and prices retreated below $60 a barrel Friday after reaching $61 mid-week.
The fundamentals suggest that the market is getting ahead of itself, as it did in the second half of 2019, when prices soared to $75 a barrel before crashing to about $40. To put economic recovery in perspective, there were 4.5 million people in the United States without a job during the last week in January, compared with 1.6 million during the same period in 2020.
Crude oil prices, however, are about 10 percent higher than they were at this point last year, when the novel coronavirus that causes the deadly COVID-19 was just making headlines. Since then, an estimated 2.4 million people have died worldwide because of complications from COVID-19.
Yet to hear policymakers in the energy space, the situation is somehow back to normal. Russian Deputy Prime Minister Alexander Novak, a member of the joint committee monitoring market conditions for the producers operating under the OPEC+ umbrella, said last weekend the price is reflective of a balanced market.
That may be so. Russia and Saudi Arabia are the de facto leaders of the two dozen or so producers who agreed to trim crude production to prevent another collapse in oil prices.
On top of that agreement, Saudi Arabia has cut production by another 1 million barrels per day, hoping to keep the price of oil at a level that’s supportive of producer economies.
But the economists at the Organization of the Petroleum Exporting Countries noted the negative economic impact from the social restrictions to control the pandemic are expected to linger at least through the first quarter of the year.
And a strong rebound in oil demand isn’t likely until the second half of 2021.
Hope over experience
The voluntary production restraint has matched the weaker demand to some degree, supporting the rally in commodities.
Bob McNally, president of the Rapidan Energy Group, a Washington consulting firm, said, however, the rally seemed to be breaking away from what fundamentals would otherwise support.
“We, like most barrel counters, expect stock draws and the unexpected Saudi voluntary cut to be price supportive,” he said. “But the view here is crude's price rally has decoupled from supply and demand fundamentals and reflects positioning by investors (for a strong recovery) driven by vaccinations, fiscal stimulus and a torrent of central bank liquidity.”
In the United States, the acquittal of former President Donald Trump on charges of inciting the insurrection on Jan. 6, clears the way for the Biden administration to push ahead with a $1.9 billion stimulus package.
While the consensus among economists is that the massive spending plan is needed to speed a recovery, some, including former Treasury Secretary Larry Summers, have warned that it risks reigniting inflation.
While overall inflation remains low, energy prices have moved up quickly. For gasoline, inflation jumped from 0.5 percent in November to a 7.4 percent last month.
That should be detrimental to further growth in demand, which in turn could snuff the rally, analysts said. The national average retail price for a gallon of regular unleaded gasoline at $2.50 for Monday, a 2.5 percent increase from this time last year, according to AAA.
Business and consumer spending on items like travel will likely remain suppressed as companies embrace the work-from-home model, further moderating the hoped-for rebound in demand.
Consumers also may start moving toward electric and hybrid vehicles as automakers produce more of them as climate change policies kick in.
Finally, much of the rally depends on how long OPEC+ can maintain its production discipline, which is more of an anomaly than a given, analysts said.
“We do expect fundamentals will eventually reassert themselves and knock Brent back into the $50s,” Rapidan’s McNally said.
No comparison
Any comparisons between global economic indicators now and pre-pandemic conditions are meaningless given the profound damage done to the economy.
Recall that U.S. crude oil prices traded deep in negative territory last year and the U.S. economy experienced the greatest contractions since the end of World War II. Job growth, which rebounded as business shutdowns ended in the spring, has stalled in recent months.
The market has rallied, in large part on sentiment — the hopes or expectations the economy and energy consumption will return to normal as vaccinations bring the coronavirus pandemic under control. The road back to normal, however, could be long.
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Is the oil market rally getting ahead of fundamentals? - Houston Chronicle
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