Traditionally ahead of a major event, such as a new US presidential inauguration, markets are filled with enthusiasm for a new policy era, and oil markets are no exception.
The Biden administration is not only seen as the beginning of more political stability in the US, but also as the catalyst for a generous relief package that will create more economic activity and more demand for oil as a result.
More spending means more money changing hands, more transport and more products, and oil fuels that.
Today, there is one more important piece of news – the “act big” statement from incoming US Treasury Secretary Janet Yellen. Yellen’s testimony at the confirmation hearing yesterday helped buoy financial market spirits, laying the grounds for an intention to support massive fiscal stimulus to jolt the US economy back into gear.
Last but not least, traders are looking forward to seeing crude stocks falling further, a likely scenario, taken the lack of Saudi shipments. A further relief of stocks provides an extra pillow for times of low oil demand, a support to prices. After all it was storage worries that sent prices to negative a year ago.
In the meantime, support is not coming from developments on the Covid-19 front, where things don’t seem to get better yet.
China is encouraging people to remain in their cities instead of travelling for the Lunar New Year holidays as infections flare up in several provinces. If the Chinese follow government advice, we are talking about a massive reduction in seasonal road fuel consumption in the country.
Lockdowns are still a troubling reality for global oil markets and the world has to open up a bit if we are to see a normalization in oil demand this year.
Yet, no one wants to be caught on the fence if indeed demand jolts back into gear from April-May, and that’s also explaining the cautious positivity in the market.
Nevertheless, caution should be warranted, as the threat of a dip in the demand trend is present, given the renewed outbreaks.
The market currently tries to see past the first quarter, but if current price levels can survive with the oxygen provided from the Saudi cuts and US fiscal stimulus expectations remains to be seen.
