The rally in oil since the US elections at the start of November has been stunning. There has been a strong move higher too on the Pfizer/BioNtech vaccine news. This twin dose of news has led to strong gains across the crude complex. Brent crude has gained +25% on the month and WTI over +35% since election night. What a run for oil, but can it continue? Key to answering that question will come from next week’s OPEC+ meeting.
OPEC+ to determine oil’s next move
The key issue is whether OPEC+ will postpone the supply that is scheduled to return for the start of January. Current market expectations are that these production cuts will be extended for 3-6 months. Remember, that whenever trading the news we want to be aware of the base case. So, this is the base case for next week, that OPEC+ is expected to hold back supply. The market reaction we can expect is that:
- If OPEC+ extend production cuts there will be minimal market reaction (as this is expected).
- IF OPEC+ do not extend cuts there will be sudden oil selling as this is unexpected. (No cuts means more supply which means lower oil prices).
Demand to return, but it may take some time
The recent rally higher in the crude complex has been on the expectations of global demand returning. A vaccine will allow the world to start using fuel again. Cars, aviation and construction can begin in earnest. A Biden presidency has further helped oil in the near term and timespreads have firmed up showing that concerns on large oil surpluses are dissipating. However, there is plenty of Global Crude oil in floating storage compared to the pre-pandemic levels. See chart below.
So there should still be some pull backs in oil’s movements higher on the ebbs and flows over the next few weeks and months, but in the near term look at OPEC+. If OPEC+ extend cuts then look out for buyers on the dips marked on the chart at the very top.