What do you feel is happening in the oil market? Are you seeing a deleveraging angle?
There was quite a shocking plunge of 7% in Brent and WTI Future yesterday. It was back to one-month lows. There are both fundamental and financial market factors. On the fundamental front, there have been growing worries about global oil demand recovery, based on what is happening in continental Europe.
The euro zone major economies are struggling to get Covid under control. A lot of them have been talking about a third wave of Covid and they are struggling to get their vaccination drive up and running. They have had one setback after another since January. So that makes the traders in the oil markets pause a little bit, though Europe is by no means an engine of global oil demand growth. It is Asia mostly. But nonetheless it is just a reminder to traders that this may not be a smooth lift off for the world as far as leaving Covid behind is concerned.
As far as financial markets are concerned, we saw quite a bit of turmoil yesterday. The inflation fears wax and wane from one day to another and are definitely impacting oil market sentiment as well. We have seen quite a close correlation in recent weeks, whenever there is heightened fear. A risk-off trade in the financial markets is reflected in the stock market selloff. We tend to see crude being sold off as well. Yesterday was a combination of this sort of pessimism on both fundamentals and financial front.
The market is waiting for cues to understand the direction crude will now take. Now it seems to be just on the cusp of recovery. We are once again seeing caution set in.
We are in a period of heightened uncertainty. That is going to remain the case for the next several months. Nobody dares to actually predict but we can come up with some sort of logical conclusions and connect the dots. So as far as fundamentals are concerned, I am optimistic that Europe will get its act together. We have seen in the past couple of days that countries are starting to put aside the fears over AstraZeneca vaccine and the process that had halted will start once again. There will be a gradual recovery in oil demand sentiment with regard to the world and Europe. I expect that to prop up crude.
More importantly, the point I would like to make here with regard to fundamentals is that the Saudi oil minister and the Saudi policy with regards to OPEC plus cuts are going to feel very vindicated after what happened yesterday. They have been cautioning that Opec should not rush to open the tap and we could see that. Until now, the expectations were that in April, when the ministers next meet, they will agree to put more oil back into the market from May. It could remain on hold for a little bit longer.
So that may support crude prices a little bit but it remains to be seen. Opec has been full of surprises. On the financial front, markets are still and they are very volatile. Yesterday’s selloff may be seen by some as bargain hunting and a bounce higher today which will prop up crude a little bit.
