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CommoditiesWhy the time is not yet ripe for an oil price rally

Symbolic picture: oil pump
Symbolic picture: oil pumpdpa

In the past few days, the prices for crude oil have climbed to their highest level since the beginning of the Corona crisis. On Thursday morning (November 26th) a barrel of the US variety WTI cost around 45 US dollars. For a barrel of North Sea Brent, around 48 US dollars were called on the market. Oil has not been so expensive since the beginning of March, when the world went into its first lockdown, the cars stayed in the garages and there were hardly any planes in the sky.

Brent Crude Crude Oil ICE Rolling Commodity (Price per barrel in dollars)

Brent Crude Crude ICE Rolling Commodity Chart

There are two reasons for the mini rally. The first: The good news from vaccine research has given investors hope that the Covid-19 pandemic will soon be over. When the world returns to pre-crisis mode, people go back to the office and go on vacation, then the demand for oil is likely to rise again, and with it the price of “black gold”. The second reason for the price plus: The members of the Organization of Petroleum Exporting Countries (OPEC) and some other oil-producing countries will meet next week to discuss whether they should further reduce production.

It will take some time until normalization

The arguments for a rising oil price cannot be dismissed out of hand. However, there are weighty arguments against them. For example on the subject of vaccines: the hope for a quick normalization is only too understandable. Scientists warn, however: It will be many months before a life like before the Covid 19 pandemic is possible. The new vaccines must be approved, produced, properly stored and distributed across the board. Billions of people need to be vaccinated. This takes a while. Before what is arguably the largest vaccination campaign in human history is not over, mobility is likely to remain well below pre-crisis levels, and economic demand for oil will be low.

The bet on sustained funding cuts could initially work. However, these are only likely to have a short-term effect on the oil price. Michel Salden, head of the raw materials division at Vontobel Asset Management, estimates that the OPEC members and some other countries will likely cut back their crude oil production for a further three to six months. During this time, however, a large proportion of Europeans and Americans are likely to stay at home. A look at the number of infections in many European countries and in the USA shows that the corona wave is still rolling with force. In December alone, the demand for oil will fall by 1.5 million barrels per day due to mobility restrictions, Balden estimates.

The oil price will only recover sustainably in the second half of 2021

Only in the second half of the coming year is the demand for the “lubricant of the economy” likely to pick up so strongly that the oil price will rise over the long term, says the Vontobel expert. For the second half of 2021, he expects a price level between 50 and 55 US dollars per barrel. The price is only likely to jump above this level again when stocks are depleted and aviation is doing better again. The oil price last stood at more than $ 55 at the beginning of this year, when Corona was still a Chinese problem.

Should the oil price remain low for the time being, despite the recent price hikes, this is good or bad news, depending on your perspective. Anyone who speculates on a rising price, for example with futures or exchange-traded raw materials, is unlucky. On the other hand, drivers and hood owners who heat with oil are lucky: they will hardly be able to get through the winter as cheaply as this year.


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