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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Three Things That Will Drive Oil Prices In May

The Energy Sector (NYSEARCA:XLE) has taken the lead in the S&P midday sector standings on Wednesday trading, jumping 3.5% as OPEC+ appears ready to stick with earlier plans to slightly increase oil production from May 1. The OPEC technical committee has issued a bullish oil demand forecast, although a hawkish tone by the Fed could derail the recent oil price gains.

Meanwhile, the Federal Open Market Committee (FOMC) meeting is scheduled to take place on 27-28 April 2021, with the committee set to announce any changes to its monetary policy immediately after. 

Another big catalyst: Covid-19, which continues being a big wildcard that's confounding bulls and bears alike.

On the one hand, one of the fastest Covid-19 vaccination campaigns has enabled the United States to rapidly ease lockdown measures and add serious momentum to the world's largest economy.

On the other hand, analysts have warned that a worrying outbreak of coronavirus in India, the world's third largest oil importer, along with resurgence of cases in Japan and Brazil, could seriously dent oil demand. 

Here are three scenarios that could determine the oil trajectory in May.

#1. OPEC Meeting: Strong oil Demand

OPEC+ has ditched plans to hold a full ministerial meeting on Wednesday and instead plans to gather in early June after a technical meeting on Tuesday voiced concerns about surging Covid-19 cases.

The good news: The technical committee has forecast global oil consumption to rebound by 6M bbl/day this year, according to delegates who attended the panel.

Related Video: Oil on Guard over Yemen as Saudi, Iran Meet in Secret

The optimism is mainly being driven by the United States, where a demand recovery is seen outpacing much of the world while China's oil demand has even managed to surpass pre-pandemic levels according to BP Plc (NYSE:BP) Chief Executive Officer Bernard Looney.

Will a confirmation of that position on Wednesday be enough to drive another big oil price rally? 

Probably not.

Whereas OPEC+ decision to skip the ministerial meeting suggests that the organization is happy with where the markets are right now, a lot of that optimism is already heavily priced in, according to Edward Moya, senior market analyst at Oanda Corp. 

More worrying is the fact that the report by the technical committee was not exactly glowing, with the committee warning that a serious Covid-19 resurgence could throw a monkey wrench into the expected recovery.

The oil markets, though, could still realize significant gains given that crude prices remain below their recent highs.

#2. FOMC Meeting: Economic Inflection Point

Source: Financial Times

Since Fed officials last convened in March, evidence has been growing that the U.S. economy is on much stronger footing than at the beginning of the year.

In fact, Fed chair Jerome Powell said earlier this month that the U.S. economy is at an "inflection point."

There's little doubt that U.S. economic data is now printing some pretty impressive numbers.

The U.S. labor market has staged a strong rebound from the pandemic lows while the New Durable Goods Orders confirmed a serious increase in new orders, thus affirming that economic growth is accelerating. 

That said, experts feel that FOMC will be careful to avoid painting an overly optimistic picture by overstating the improvements. It will have to be confident that economic growth is picking up in a way that it can eliminate the labor market slack and maybe even add a bit to inflation. Related: Can Big Oil Lure Investors Back?

Vincent Reinhart, a former Fed economist who now serves as chief economist at Mellon, says it might be too early for the Fed to even start considering cutting its $120-billion-a-month bond purchases, given that the unemployment rate remains high at 6% while the core personal consumption expenditures (PCE) price index remains in check at 1.4%.

Economists at Goldman Sachs reckon the Fed will avoid taper talk until the second half of the current year and won't start actual tapering till early 2022--a positive for the oil and gold markets.

That said, Aneta Markowska, chief economist at Jefferies, has warned that a very strong job report—with 1m or more jobs added a month—could accelerate this timeline, with initial tapering discussions starting as early as June.

#3. Covid-19 Wildcard

The global pandemic remains, by far, the biggest wildcard in the long-term oil price outlook.

The trends have been really encouraging in the U.S.,UK, and China; Mixed in Europe with coronavirus restrictions easing in some countries while others remain hesitant to take any bold actions but very worrying in India, Brazil and Japan where OPEC+ says a resurgence could wipe out 350K barrels per day in global oil demand.

As things stand now, however, there's optimism that other countries will avoid slipping into India's dire situation. At least nine countries, including U.S., UK, China, Australia, Germany, and Pakistan among others have pledged to help India overcome its tragic humanitarian crisis by sending much-needed medical equipment, vaccines, oxygen, vaccines, and treatments.

Hopefully, other countries will learn from India and avoid relaxing restrictions too soon.

By Alex Kimani for Oilprice.com

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