Yesterday’s oil price dip is no big surprise to trading floors, rather a reminder that the market actually works, correcting excess gains when needed. Oil prices touching 70 dollars may have been a step too far, a level created by a boost of enthusiasm over the OPEC+ meeting and the US stimulus bill.
Prices are currently largely stable, maintaining yesterday’s correction. The API institute report of a large crude stock build last week was a wake-up call that although oil supply is being kept tight to balance demand, the global market cares about prices and will try to find alternatives if prices are too high.
China, a net oil importer, and other nations have been stockpiling oil at lower prices and are now in a comfortable position to use it when import prices are deemed too high.
If US crude exports dip, then it is natural that stocks will rise and reports of builds should not come as a total surprise under the current high-price environment.
Nevertheless, OPEC’s goal is served, supply is tight versus demand and oil stocks are being used, if not in the US then elsewhere.
Meanwhile prices, despite the recent correction are still very healthy and will likely stay this way as global balances indicate a supply deficit going forward.
If official data confirm the API institute’s projections later today then oil prices could take a modest additional poke downwards, but the effect of stock builds is now mostly priced in.
Activity in the US has increased due to the current price environment and if stocks start building again this could raise some eyebrows among producers who are betting on global deficits to increase output.
With the OPEC+ meeting and the stimulus bill developments mostly priced in now, a sustainable upside potential for oil prices can only come from the demand front and from how quickly the pandemic will subside.
A recovery is expected after spring but vaccination targets need to be met for such projections to materialize.
Trader attention will soon shift again to vaccination numbers and vaccine production delays. The current campaigns and vaccine distribution have not been exactly smooth so some price volatility can be expected and the direction can vary depending on news going forward.
For today though, markets will mostly focus on the US official inventory report from DOE, also taking clues from the broader risk appetite across financial assets.
