Oil prices may be falling today but the market is not in a much worse position than yesterday or the day before. The decline is a natural reaction to an unusually long streak of gains that oil has enjoyed since the beginning of February.
Traders allowed a price bubble to grow bigger and bigger and as very few dared to pop it, oil ended up valued much more than the market reality justifies.
The price rally that has been on till yesterday’s close may take some time to be repeated as finally the reality is being priced in, namely the slow pace of the oil demand recovery, the delays in vaccine distribution and the comeback of the US shale.
Prices were already on a modest correction mode in the morning, before the IEA also warned about the oil liquids demand and supply imbalance.
The agency’s remarks do work as another reminder that oil is not out of the woods yet and that it is premature to overvalue it when the only thing that keeps prices at healthy levels is an artificial supply cut by OPEC and allies.
When it comes to fundamentals they also don’t all exactly look great today, as supply is about to rise from Libya, where a blockade in production is finally over again.
This morning technical indicators are screaming sell, but although prices are declining, we are not yet seeing any massive sell-off neither in oil or broader financial markets.
Crude draws in the US help keep today’s price decline at low levels, they provide a soft pillow for the price deflation. A build, which the market actually had been expecting, would have set off a larger price correction.
Some pin the price pause today on the gasoline stock build in the US reported yesterday, but gasoline stocks aren’t actually high – just came back up to the 5 year average from below and also normally rise seasonally in the first six weeks of the year.
Refinery demand in the US has also stayed quite robust, especially on the Gulf Coast. Crude inventories in the US and on the Gulf Coast are coming down counter-seasonally, which is also helping firming up prices and bullish sentiment.
The bulls still have some strings to pull though, not all is dark for oil prices. Saudi Aramco is reportedly continuing to hold back supplies to customers, especially allocations to the West for March, helping to draw down visible OECD inventories which is what the Saudi strategy is aiming for.
Prices are also supported by news from the Iraqi oil minister today saying he expects OPEC+ to roll over quotas for April. This is the first clue from high-level officials about what may come on the crunch-time 4 March meeting.
A roll-over of quotas, if confirmed, would be bullish for the market, we believe, as opposed to a more expected 500,000 bpd increase.
In reality though, OPEC+ will likely increase output in April even if quotas were to be rolled over, as $60 oil would tempt cash-squeezed state-operators to sell an extra cargo or two.
OPEC+ discipline is necessary for this rally to not completely derail, as the balance of oil supply and demand is fragile due to the vaccination campaigns being behind schedule.
The current oil price still looks like a snowball, even if it is losing a bit of weight today, as speculative traders have piled on long positions over the past two months.
Even super-cycle rallies have corrections, but the market has not received any large enough news for a shock price trimming, at least not yet.
