Crude oil futures have risen higher over the past few weeks, resisting the usual trend of profit-taking before the Christmas holidays. At Friday’s session, WTI traded as high as $ 49.20 with Brent crude oil, quoted at $ 52.40, levels they last reached in February before the oil price crash.
Of course, the biggest question for most traders at this point is whether this rally has the legs to continue during the festive season and even beyond.
On a purely technical basis, crude oil has reached a higher high on the weekly list since April. The latest high occurred on December 10, with the following expected around the psychological $ 50 level on NYMEX futures. The next technical resistance levels are mid-February of $ 54.50 as well as the 2020 high of $ 65.65.
The benchmark for oil and gas, SPDR Energy Choice Fund (XLE), has increased by 12% over the past 30 days compared to a 4% profit from the S&P 500.
Here are three key reasons why we should stay on top of the oil market.
# 1. Covid-19 vaccines A major reason why the energy sector has performed best in recent weeks is a flurry of potential Covid-19 vaccines become available.
The deployment of the Pfizer-BioNTech mRNA-based vaccine BNT162b2 kicked off in the United States last week. The vaccine reached long-term care facilities a few days ago Walgreens wants to expand the program to nearly 3 million residents and staff at 35,000 long-term care facilities. So far, just two people Serious allergic reactions to the vaccine were reportedly reported, both middle-aged health workers. However, health experts have encouraged that the vaccine is still safe for the general public. Related: Oil, gas fields increase for the fifth week in a row
The vaccine track so far suggests that the majority of the American public probably received the vaccine by the end of February, better than the one-third of the population target projected by Dr Moncef Slaoui, head of Operation Warp Speed, earlier.
Meanwhile, the EU will launch its vaccination program on 27 December 2020. A few days ago Moderna Inc. announced that the European Commission exercised its option to acquire an additional 80 million of its COVID-19 vaccine candidate, and extended the company’s total order commitment to 160 million doses.
The early success of the deployment programs has brought much optimism to the oil markets, even conservatively. BP Plc (NYSE: BP) with earlier predictions that we might pass peak oil, the company has now said demand for oil may not peak until around 2030.
# 2. Stimulus package After all the predictions of doom and gloom, the world economy seems to be recovering from the devastating pandemic a faster than expected clip. Indeed, a handful of sectors of the US and other economies have actually fallen back to pre-crisis activity levels. An important reason for the rapid recovery: unprecedented stimulus packages.
Shortly after the World Health Organization (WHO) declared Covid-19 a global pandemic, governments everywhere unveiled massive monetary and fiscal stimuli (more than $ 15 tons worldwide) in an effort to prevent an economic downturn. The U.S. federal government has stepped in with a wide range of measures, including a $ 2.3 billion package designed to support financial markets, state and local governments, employers and households.
Congress leaders finally reached an agreement on Sunday on another $ 900 billion aid package after succeeding in avoiding a government shutdown on Friday by pass a two-day extension of funding that agencies kept going on Sunday night. Congress voted Monday night on the new stimulus and it passed.
Related: The biggest energy bill in a decade has just been passed
A cross-section of analysts has warned that the generous packages could return to bite the market. New York Times bestselling author and founder of ‘The Bear Traps Report’ Lawrence ‘Larry’ McDonald warned about the ‘cobra effect’ whereby the stimuli designed to save the economy would rather … ‘causing a hyperinflationary economic collapse.”
Nevertheless, the government’s stimulus has proven to be an effective tool, at least in the short term.
# 3. OPEC + Agreement
Two weeks ago, OPEC + members met to discuss future production plans with the current production cuts that would expire at the end of the year.
The bulls hoped that the oil-producing cartel would extend the current production cuts of 7.7 million barrels per day by at least another three months. Instead, they received quite a shock after OPEC + announced that production would increase by 500,000 barrels per day from January, effectively reducing total production cuts at the beginning of 2021 to 7.2 million bpd.
Surprisingly, oil prices have continued to rise since the announcement after an initial decline. One energy analyst explains why:
‘500,000 bpd from January is not the nightmare scenario the market has feared, but it is not what was really expected weeks ago. Markets are now responding positively and prices are showing a slight increase as 500,000 extra stocks are not lethal to balances, ”Said Paola Rodriguez Masiu, senior analyst at the oil market.
In other words, the market is happy that the organization with 23 members appears to be with its production.
Another encouraging sign: the leading protagonists, Saudi Arabia and Russia, appear to be reading from the same page this time.
With the hard lessons of the oil price crash in April still fresh in his mind, it is unlikely that OPEC + will soon return to meaningless market share and price wars and thus be able to refuel the market.
By Alex Kimani for Oilprice.com
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