Price movement recap
Oil prices have surprisingly increased in the first week of January. It happened after Saudi Arabia said its oil production will be cut by 1 millions barrels per day in addition to OPEC+’s reduction. Crude oil prices are influenced by Energy Information Administration’s (EIA) and the American Petroleum Institute’s (API) reports.
https://www.eia.gov/dnav/pet/PET_PRI_SPT_S1_W.htm
Forward curve 07.01.21
Currently the future market for WTI is quite flat but with a small trend of Backwardation: opposite of contango. The spot price for delivery now is higher than today’s price for delivery in the future. Demand is greater than supply now. So, people are ready to pay a premium for delivery today. It sends a message to suppliers: supply me! don’t store! Don’t store!!
This may be due to the uncertainty about the current global economic condition and the fact that COVID cases have risen during the Christmas holiday. But at the same time, recent vaccines are starting to bring some hope about the market.
Therefore it explains the current feeling of uncertainty about the market.
https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_globex.htm
Inventory levels
According to the Energy Information Administration, there was a draw of 8 million barrels in 2020’s last week. This news made oil prices rise. This report was done the day after the American Petroleum Institute’s approximation was a draw of 1.66 million barrels, but accompanied by a significant gasoline inventory build and middle distillates of respectively 5.47 and 7.14 million barrels.
United States Crude Oil Inventories (investing.com)
Recommendation
Due to the encouraging news about vaccines the market seems to have seen the worst. Different pictures are present in the main shale oil industry. As most producers do not break even at current rates, some are pessimistic about their future. Others are positive, and among analysts there is also a possibility that the EIA and the industry itself are purposely gloomier than they need to be in order to get OPEC+ to continue its production cuts in order to keep prices higher.
Although prices have been helped by these cuts, volatility exists because not only supply decides where the industry goes, but also demand, which is arguably a far more significant factor right now. And the future remains highly unpredictable when it comes to demand, as Forbes’ David Blackmon noted in a recent post.
In the United States, the pandemic is still raging, vaccines are provided much slower than expected, and this means that the long anticipated return to normal will come longer than many hoped, even in the oil and gas sector, if it ever does. It will inevitably be all about cost and competition again, just as it was during the last crisis in the oil industry. Last time, with substantial support from oilfield service providers, U.S. shale pulled it off, and it ended up leading the boom in U.S. oil production that turned the nation into the biggest producer in the world. The first signs of what is to come later this year will be presented and whether the industry will be able to rebound as strongly from this crisis.
https://oilprice.com/oil-price-charts/45
Compared to our last bulletin where the price was at $44.70 and now raising to $50.72 per barrel (price today for delivery in early January) the recommendation was to be long (buy) for the next 3-6 months and still the same as of today. The future consumption of oil is expected to rise continuously throughout the year, since the arrival of the pandemic’s protection and the limitation of production. The market being well supplied will be contango. Prices are going up month after month. Therefore it will be interesting to buy and sell in future contracts with the higher price from the market to cover also the storage costs.
Bibliography
SLAV Irina, 2021 Oil Jumps On Major Crude Inventory Draw [online] [Viwewd 6 January 2021] Available from: https://oilprice.com/Energy/Energy-General/Oil-Jumps-On-Major-Crude-Inventory-Draw.html
SLAV Irina, 2021, U.S. Oil Executives Cautiously Optimistic About 2021 [online] [viewed 7 January 2021] Available from https://oilprice.com/Energy/Energy-General/US-Oil-Executives-Cautiously-Optimistic-About-2021.html
PETROLEUM & OTHER LIQUIDS [online] [viewed 6 January 2021] Available from https://www.eia.gov/dnav/pet/PET_PRI_SPT_S1_W.htm
CRUDE OIL – OVERVIEW [online] [viewd 6 January 2021] Available from https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_quotes_globex.htm
SLAV Irina, 2021, Oil Jumps On Major Crude Inventory Draw[online] [viewed 7 January 2021] Available from https://oilprice.com/Energy/Energy-General/Oil-Jumps-On-Major-Crude-Inventory-Draw.html