HedgeTalk - How much for a barrel of oil? $40! How long can OPEC continue to control it?
By: Johan Rosenberg, Chairman
The primary driver of the 2020 oil price slump has been mostly due to the global pandemic response, which has suppressed transportation and demand worldwide. However, last week, oil hit its highest level since early September with the market optimistic about the prospects for a vaccine. The broad market improvement is happening even as U.S. hospitalizations of COVID-19 patients continue to rise. Vaccine developments bring the prospect that we are one or two quarters away from transportation patterns trending toward normal, and more normalized demand for oil.
However, is the market over-reacting to the good news, and ignoring the likelihood of an increased death rate, restrictions, and additional lockdowns that could cause a backfire and headwinds to demand?
That prices haven’t dropped further is due to high compliance with OPEC’s Supply Reduction Program. What is the price of oil? About $40! I don’t know what is going to happen, but when we become overly complacent that order and control has been restored, something unexpected generally happens. Oil has been trading close to this $40 channel for far too long. There is a planned OPEC increase in supply of about 2 million barrels a day starting in January. It seems reasonable to expect that this increase in supply will likely be deferred, given current negative COVID-19 developments and mass vaccine distribution several months from happening.
Can Spring of 2021 arrive with predictability and without volatility? Or will we see price shocks on the downside only to be whipsawed back with “Vaccine Spring/Summer Fever Euphoria”. This euphoric feeling could run over our supply chains with pent up demand, causing sector specific price spikes and imbalances.
Irrespective of the valley we are looking across, seasonality analysis has revealed that hedging mid-winter, along with buying and selling mid to late summer, has caused positive returns in most years. This year, I think the seasonal patterns will continue, but will be more pronounced. Bottomline, keep an eye on the price of futures as COVID-19 continues to spread frustration and uncertainty. However, there are plenty of reasons to be optimistic for the latter half of 2021. Overall, I would consider lightening your positions for now, but be prepared to go long in early spring, 2021.
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