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Oil traders focus on lockdowns after weeks-long rally in prices

Oil traders focus on lockdowns after weeks-long rally in prices

Dubai: The oil price rally triggered by a larger-than-expected oil output cut by Saudi Arabia seems to have come to an end.

The world’s biggest oil exporter surprised the market earlier this month with voluntary output cuts of 1 million barrels per day (bpd) in February and March.

Brent crude prices closed down at $55.10 a barrel on Friday after surging nearly 9 per cent since the cuts were announced on January 5th. US crude prices ended the week at $52.04 a barrel.

“Oil prices already made the most out of the supply news and are now being trimmed of the excess gains,” said Bjornar Tonhaugen, Head of Oil Markets at Rystad Energy.

Meanwhile, bullish traders are clinging to the Biden administration’s $1.9 trillion stimulus plan, “which in our view will likely unleash an additional 300,000-400,000 barrels per day (bpd) of US oil demand this year,” said Tonhaugen.

Eyes on lockdowns

The Covid-19 pandemic’s spread is taking center stage again and traders are increasingly worried about the long duration of European lockdowns as well as the new restrictions China is imposing to counter a rapid growth of infections.

“Even if US oil demand ticks up a bit, if Europe doesn’t come back quickly and if China’s infection clusters expand, more demand will be lost than added, a bearish sign that traders are pricing in today,” said Tonhaugen.

Vaccination is slow

“Vaccination campaigns have been a bit slower than what the market was hoping in December, despite warnings that it would indeed take time for the world’s population to get the shots,” said the Rystad Energy analyst.

“After vaccinations gear up significantly, that’s when the market will be able to advance prices again to the next level,” he added.

Stimulus uncertainty

“Oil needed a big catalyst to keep the recent rally going so energy traders didn’t need much to head for the sidelines,” said Edward Moya, Senior Market Analyst, OANDA.

“The dollar rebound could last a little longer as Congress will have the standard back-and-forth over stimulus negotiations,” said Moya. “Stimulus uncertainty should keep commodities under pressure as risk aversion flows will boost the greenback”