Oil: too far too fast?

Today, the Brent crude futures exceeded $90/bbl, for the first time in the last 7 years. From the beginning of 2021, the oil price went up by about around 67%. At the end of last year JP Morgan forecasted that in 2022 oil price will reach $125 a barrel. The rally is likely to continue in the long-term due to the limited supply and the roaring post pandemic return of global demand.

At the same time, after going too far and too fast, the oil prices are likely to take a breather in the short-term. Below are some thoughts explaining why we believe this. However, only time will tell if at least some of the ideas reflect reality.

According to the the agreement with the US, China is going to release some oil (quantities unknown) from its strategic reserves close to the Lunar New Year holidays between January 31 to February 6. This is part of the coordinated international plan to limit growth in oil prices.

Chinese government asked its people not to travel from big cities, including Beijing, during the holidays. The country is trying to prevent any potential spread of the Omicron virus, which is especially important before the Olympic Winter Games, which will take place from February 4 to February 20 in Beijing. A lower demand from the second largest economy; and an increased supply at the end of January to early February are likely to create some downward pressure on oil in coming weeks.

In addition to fundamental factors such as the supply and demand balance, the recent increase in oil and gas prices is strengthened by the geopolitical tensions: the Russian threat to invade Ukraine. Today the Russian military invasion seems less likely, as it is hard to imagine that Russia will steal the "thunder of Olympic victories" from China by starting a war. Any military conflict requires the full focus of the leadership. It is easier to imagine the Russian elite cheering on their hockey team in Beijing, than concentrating on wide scale military and propaganda operations.

By the end of the Winter Olympics, the USD could strengthen, reflecting the end of QE and the nearing rates hike by the FED (the first hike is likely in March). Stronger USD would create further headwinds to commodity prices including the price of oil. However, this short-term softening is likely to end with the post pandemic reopening of global economies, resulting in a higher demand for energy.

Here are some names in the Energy sector that could move, if the above scenario proves true.

This blog does not provide investment advice. Please do your own research and talk to professionals before investing.

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