The price rally that Saudi Arabia kickstarted after the OPEC+ meeting seems to be over, as oil prices already made the most out of the supply news and are now being trimmed of the excess gains.
Bullish traders are clinging to the Biden administration’s $1.9tn stimulus plan, which in our view will likely unleash an additional 3-400,000 bpd of US oil demand this year, but the market is not paying too much attention to that today.
Even if US oil demand ticks up a bit, if Europe doesn’t come back quickly and if China’s infection clusters expand, more demand will be lost than added, a bearish sign that traders are pricing in today.
Refinery maintenance season is also ahead of us and suddenly Saudi Arabia’s move is starting to seem more rational to many in the market whose jaw dropped when the kingdom announced deeper production cuts.
The market has its own warning signs, such as the Brent prompt time spreads which are weakening, meaning that traders are less sure that March supply-demand balances will be as tight as priced in just a week ago.
The market is structurally bullish, but it may be getting too ahead of forward-looking fundamentals.
The Saudi cut announcement may have coincided with some extra oil-for-power demand due to the cold snap, which benefited prices, but now traders start getting increasingly worried about further travel restrictions and lockdowns.
Worsening US-China relations are also a concern this morning, which dents medium-term expectations for the demand recovery, not in the immediate months ahead.
Covid-19 infections are now keeping prices from growing further and traders will be waiting for delayed vaccination campaigns to speed up before releasing the bulls again.
Vaccination campaigns have been a bit slower than what the market was hoping in December, despite warnings that it would indeed take time for the world’s population to get the shots.
After vaccinations gear up significantly, that’s when the market will be able to advance prices again to the next level.
