CRUDE OIL FUNDAMENTAL FORECAST: SUPPLY & DEMAND DYNAMICS TO BOLSTER WTI PRICES

Crude oil price action staged a remarkable rally during 1Q-2021. In fact, the commodity surged as much as 40% at its year-to-date high around $68.00 a barrel in early March. The strong bid beneath crude oil broadly tracked market optimism surrounding covid vaccine developments, massive fiscal stimulus packages, and improved outlook for global GDP growth. That said, during the second half of March, virus fears resurfaced and seemed to be pressuring the commodity. Is this stretch of short-term weakness set to continue into 2Q-2021 or will crude oil resume its ascent?

GLOBAL COVID VACCINATION EFFORTS TO ACCELERATE & PROP UP CRUDE OIL

Demand for crude oil hinges largely on the ebb and flow of economic activity, which is predominantly being driven by the course of the pandemic. Reopening efforts and the reflation trade are faltering as another wave of covid cases ravages key global economies and consumers of oil – such as in Europe. This weighed negatively on the crude oil outlook and fueled a notable correction in oil prices from early March highs to quarter’s end. Looking ahead to 2Q-2021, however, there is potential for the commodity to find some support and rebound higher.

GLOBAL COVID-19 CASES AND VACCINATIONS (MARCH 2020 – MARCH 2021)

Source: Bloomberg

While the Eurozone and UK may be struggling with covid vaccine rollouts, this speedbump will likely be smoothed out. Moreover, the United States is administering over 2.5-million covid vaccines per day and is on pace to vaccinate 75% of its population within the next five months. This positive trend in vaccinations, coupled with businesses learning to operate better amid the pandemic and lockdown restrictions, stands to keep the reflation trade alive and crude oil prices afloat.

CRUDE OIL PRICE ACTION MIGHT RESUME ITS CLIMB WITH HELP FROM OPEC+ SUPPLY CUT ROLLOVER

Shifting focus to the supply side, OPEC+ output stands out as another primary fundamental catalyst for the price outlook. The cartel of oil producers are set on rolling over existing production cuts through April led by a 1-million barrel per day reduction in output from Saudi Arabia. This recent development caught markets by surprise, since an increase in output was expected, and sent crude oil prices catapulting.

OPEC CRUDE OIL PRODUCTION BASED ON SECONDARY SOURCES

Source: OPEC

The unexpected decision also sent a message that OPEC and its allies look to keep the oil market well supported. This brings OPEC+ meetings onto the radar with the next event scheduled for 01 April 2021. What’s more, monthly oil market reports released by OPEC or IEA could be of further interest to help traders gauge relative shifts in short-term supply and demand dynamics. Meanwhile, potential tension and conflict in the Middle East may create additional tailwinds for oil prices as this could materially impact output.

MARKET VOLATILITY, RISK APPETITE TO WEIGH ON THE DIRECTION OF CRUDE OIL

The price of crude oil generally maintains a strong inverse relationship with the S&P 500-derived VIX Index, or ‘fear-gauge,’ as illustrated on the chart below. This typically negative correlation between oil prices and the VIX is linked by their connection to investor demand for risky assets.

LIGHT CRUDE OIL FUTURES & VIX INDEX (JULY 2018 – MARCH 2021)

Source: TradingView, Chart by @RichDvorakFX