Optimism seems to be ruling global oil markets at the moment.
Even the recent OPEC report, in which the global oil group cut its demand predictions for Q2 2021 by more than 690,000 bpd, seemed unable to alter price assessments. Bullishness stemming from the OPEC+ production cuts continues to rule the market, with analysts happy to assume that the cartel will remain optimistic in its assessment of H2 2021.
With oil prices hovering around $70 per barrel and some analysts even suggesting that the fabled $100 per barrel is within sight, it seems all sense of realism has been lost. Brent is set for its eighth straight week of gains, and the market is happy to all but ignore the fundamentals.
Analysts seem convinced that demand recovery in H2 2021 is a certainty. If you were to ask them what that assumption is based on, there is no specific answer but rather a reference to ‘sentiment’. Biden’s recent announcement that Americans could be having barbecues with their families on the 4th of July, that sentiment is only growing stronger. Additional financial support schemes around the world are adding to this sentiment. In fact, oil prices seem to be more closely linked to the cash injections being given out around to world than to historic fundamentals. However, as we all know, “there’s no such thing as a free lunch”. These financial injections are going to come at a cost. No normal economy can continue to spend as its income continues to fall. At the end of 2021, a major rebalance in payments can be expected, and there will be many losers. In the coming months, demand is expected to weaken slightly, as highlighted in OPEC’s recent report. The bullish sentiment in oil markets seems based on the period after summer though. Strong demand in the second half of the year will depend on successful COVID vaccination schemes and a decrease in global lockdowns. If the optimistic predictions of a successful summer fight against covid don’t come true, oil bulls are set to be slaughtered.
The current commodities frenzy has largely been fed by institutional investors and hedge funds, all vying to reap the financial rewards of an over-optimistic market. Media reports have been fueling this optimism, as most investors prepare for the recovery of crude oil demand. Fuel analysts are confident that driving season in the U.S. and Europe will increase prices despite most vaccination projects still being far from complete. With no real travel increase on the horizon, a fuel demand increase seems far from certain. Additionally, when looking at the oil futures market, it seems optimism isn’t as strong as it first appears. Net long vs net short positions are at nearly the same level. So even when it comes to bullish sentiment, it seems media reports are exaggerating where we are.
When looking at current price settings, hovering around $70 per barrel, and plenty of bullish sentiment amongst analysts, observers should be worried. In a normal…
Read More: Oil Bulls Beware: This Optimism Is Unjustified