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Oil Bounces Back on Rate Cut Optimism

Oil Bounces Back on Rate Cut Optimism

The market reacted positively to…

Alex Kimani

Alex Kimani

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

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3 Reasons Why Oil Could See An End Of Year Rally

Crude trading

Crude oil futures have been edging higher over the past few weeks, defying the usual trend of profit-taking ahead of the Christmas holidays. WTI was trading as high as $49.20 on Friday's session with Brent crude quoted at $52.40, levels they last touched in February before the oil price crash.

Naturally, the big question for most traders at this point is whether this rally has the legs to continue into the festive period and even beyond.

On a purely technical basis, crude oil has been making higher highs on the weekly charts since April. The latest peak came on Dec. 10 with the next expected around the psychological $50 level on NYMEX futures. The next technical resistance levels are at the mid-February high of $54.50 as well as the 2020 peak of $65.65.

The oil and gas benchmark, Energy Select Sector SPDR Fund (XLE), has gained 12% over the past 30 days compared to a 4% gain by the S&P 500.

Here are three key reasons why we remain bullish about the oil market.

#1. Covid-19 Vaccines A big reason why the energy sector ranks has emerged as the best performer over the past few weeks is a flurry of potential Covid-19 vaccines becoming available.

The rollout of the Pfizer-BioNTech mRNA-based vaccine BNT162b2 kicked off in the United States last week. The vaccine reached long-term care facilities a few days ago with Walgreens looking to expand the program to nearly 3M residents and staff at 35,000 long-term care facilities. So far, only two people have been reported to have recorded severe allergic reactions  to the vaccine, both middle-aged health workers. However, health experts have sent ressurances that the vaccine is still safe for the general public.  Related: Oil, Gas Rigs Increase For Fifth Week In A Row

The vaccine trajectory so far suggests that the majority of the American public are likely to have received the vaccine by the end of February, better than the one-third of the population target that Dr. Moncef Slaoui, head of Operation Warp Speed, had earlier projected.

Meanwhile, the EU is set to rollout its vaccination program on December 27, 2020. A few days ago, Moderna Inc. announced that the European Commission had exercised its option to purchase an additional 80M of its COVID-19 vaccine candidate, expanding the company's total order commitment to 160M doses.

The early success of the rollout programs has instilled plenty of optimism into the oil markets with even conservative BP Plc (NYSE:BP) backtracking on its earlier projections that we might have passed peak oil with the company now saying oil demand might not peak till around 2030.

#2. Stimulus Package After all the predictions of doom and gloom, the global economy appears to be recovering from the devastating pandemic at a faster-than-expected clip. Indeed, a handful of sectors of the U.S. and other economies have actually bounced back to pre-crisis levels of activity. A key reason for the fast recovery: Unprecedented stimulus packages.

Shortly after the World Health Organization (WHO) declared Covid-19 a global pandemic, governments everywhere unveiled massive monetary and fiscal stimuli (over $15T globally) in a bid to forestall an economic fallout. The U.S. federal government stepped in with a broad array of measures, including a $2.3 trillion package designed to support financial markets, state and local governments, employers, and households.

Congressional leaders finally reached a deal on another $900 billion aid package on Sunday, after managing to narrowly avoid a government shutdown on Friday by passing a two-day extension of funding that kept agencies running through Sunday night. Congress voted on the new stimulus on Monday evening and it passed.

Related: The Biggest Energy Bill In A Decade Was Just Passed

A cross-section of analysts have warned that the generous packages could come back to bite the markets. New York Times bestselling author and founder of 'The Bear Traps Report' Lawrence 'Larry’ McDonald has warned of the ‘cobra effect’ whereby the stimuli designed to save the economy  will instead ‘‘...cause a hyperinflationary economic collapse.’’

Nevertheless, government stimulus has proven to be an effective tool, at least in the short-term.

#3. OPEC+ Agreement

Two weeks ago, OPEC+ members met to discuss future production plans with the current production cuts set to lapse at the end of the year.

The bulls were hoping that the oil-producing cartel was going to extend the current production cuts of 7.7 million barrels per day for at least another three months. Instead, they received quite a jolt after OPEC+ announced that it will increase production by 500,000 barrels per day beginning in January, effectively lowering total production cuts at the start of 2021 to 7.2 million bpd.

Surprisingly, oil prices have continued to rally since the announcement after an initial dip. One energy analysts explains why:


500,000 bpd from January is not the nightmare scenario that the market feared, but it is not what was really expected weeks ago. Markets are now reacting positively and prices are recording a small increase as 500,000 of extra supply is not deadly for balances,” Rystad Energy senior oil markets analyst Paola Rodriguez Masiu has declared.

In other words, the market is happy that the 23-member organization appears to be exercising caution with its production.

Another encouraging sign: Leading protagonists, Saudi Arabia and Russia, appear to be reading from the same page this time around.

With the harsh lessons of the April oil price crash still fresh in its mind, it’s unlikely that OPEC+ will revert to senseless market share and price wars any time soon and therefore risk tanking the markets again.

By Alex Kimani for Oilprice.com

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