Oil Markets Ignore Bearish Risks

U.S. West Texas Intermediate crude oil futures are edging higher on Friday as investors showed no signs of lightening up on the long side ahead of the weekend and next week’s holiday-shortened week.

The market is currently trading at its highest level since March 3 as traders shrugged off negative future demand news throughout the week and instead focused on the optimism created by the rollout of the coronavirus vaccines and hopes for a new fiscal stimulus deal. A weaker U.S. Dollar, which fell to more than a 2-1/2 year low also drove up demand for the dollar-denominated commodity.

Vaccination Campaign Kicks-Off, but Pandemic Concerns Linger

The United States kicked off its vaccination campaign against COVID-19, buoying hopes that pandemic restrictions could end soon and lift demand at the world’s largest oil consumer.

Major European countries continued in lockdown mode to curb the spread of COVID-19 which has reduced fuel demand. For example, Germany, the fourth-largest economy in the world, plans to impose stricter lockdowns from Wednesday to battle the virus.

“While the market has been buoyed by the rollout of COVID-19 vaccines, a path towards normalization of demand remains a difficult one,” ANZ analysts said in a note.

COVID-19 Impact

More than 73.65 million people have been reported to be infected by the coronavirus globally and 1,654,920 have died, according to a Reuters tally on Friday.

The spike in cases is leading to tough restrictions on travel, impacting fuel demand and any economic recovery.

OPEC Cuts 2021 Oil Demand Outlook Again as Pandemic Impact Lingers

The lingering impact of the COVID-19 pandemic is hampering efforts by OPEC and its allies to support the market, leading OPEC to warn that the rebound in demand in 2021 will be slower than expected.

Demand will rise by 5.90 million barrels per day (bpd) next year to 95.89 million bpd, OPEC said in a monthly report. The growth forecast is 350,000 bpd less than expected a month ago.

The cartel has steadily lowered its 2021 demand growth forecast in recent months.

Vaccine Impact on Moribund Oil Demand is Several Months Away – IEA

The roll-out of vaccines this month to combat the coronavirus pandemic will not quickly reverse the destruction wrought on global oil demand, International Energy Agency (IEA) warned on Tuesday.

“The understandable euphoria around the start of vaccination programs partly explains higher prices but it will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand,” the IEA said in its monthly report.

“In the meantime, the end of year holiday season will soon be upon us with the risk of another surge in COVID-19 cases and the possibility of yet more confinement measures.”

Pressure Could Be Building on OPEC

ANZ Research said with U.S. COVID-19 infections hitting new daily records, and restrictions tightening in Japan, pressure is growing on the Organization of the Petroleum Exporting Countries (OPEC), Russia and their allies, together called OPEC+.

OPEC+ plans to add 500,000 barrels per day of supply in January, in a first step toward a 2 million bpd target.

Oil Tanker Attack Serves as Reminder of Middle East Supply Dangers

Shipping company Hafnia said on Monday that one of its oil tankers had been hit by an unidentified external source caused fire and explosion while the ship was discharging at Jeddah port in Saudi Arabia.

“BW Rhine has been hit from an external source whilst discharging at Jeddah, Saudi Arabia at approximately 00:40 local time on 14 December 2020, causing an explosion and subsequent fire onboard,” Hafnia said in a statement on its website.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed when buyers took the March 3 high at $49.07. A trade through $34.50 will change the main trend to down so it’s safe for now, but still vulnerable to a reversal top or short-term correction because of overbought conditions.

The main range is $57.58 to $27.22. Its retracement zone at $46.04 to $42.45 is controlling the longer-term direction of the market. Crude oil is currently in a position to close on the bullish side of this area.

Weekly Technical Forecast

Based on this week’s price action, the direction of the February WTI crude oil market the week-ending December 25 should be determined by trader reaction to the 61.8% level at $46.04.

Bullish Scenario

A sustained move over $46.04 will indicate the presence of buyers. If buyers can trigger a strong breakout over $49.07 then this will indicate the rally is getting stronger, putting the market on track for a test of the February 20 top at $53.60.

Bearish Scenario

A sustained move under $46.04 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the 50% level at $42.45. This is a potential trigger point for an acceleration to the downside. However, with the main trend up, buyers are likely to come in on a test of this level.

Short-Term Outlook

This week’s price action suggests that all of the good news regarding the vaccines and stimulus have been fully-priced into the market, which usually means it’s probably time for some traders to take some profits off the table.

This week will also be remembered as the week where speculators increased long positions and mostly ignored the warnings from OPEC and the IEA about weaker future demand.

A short-term pullback into a value area would be acceptable and quite normal. We’re not anticipating a change in trend, but conditions could change if the hedge funds decide to trim their long positions more than expected.

Additionally, comments from OPEC+ members could be the source of volatility as they continue to assess the supply/demand situation in the wake of rising prices and surging COVID-19 cases. Questions will be asked this week about whether OPEC feels the market is strong enough to withstand an additional 500,000 barrels per day of crude oil starting in January.

Technically, the rally is strengthening and the market will remain bullish as long as $46.04 holds as support. Look for increased volatility because we expect the size of the daily ranges to widen as the market moves higher.

On the downside, the source of any weakness will likely be a problem with the vaccines or a tremendous surge in COVID-19 cases that shuts down major parts of the U.S. economy.