It’s been disheartening for the bulls that oil prices have failed to break out over the past few weeks despite a flurry of positive news including declining inventories and reports that OPEC+ producers have mostly been sticking to their pledged cuts.
And now the pendulum has swung to the opposite end and oil markets have to climb a new wall of worry.
After a brief, half-hearted rally, oil prices have dropped back to a familiar trading range in the low-$40s after the Labor Department reported that U.S. weekly jobless claims totaled 1.106 million last week. This comes just a week after the tally dipped below the 1M mark for the first time since March, thus raising serious doubts about the sustainability of the economic recovery.
“With all the bullish headlines that we’ve seen over the last weeks regarding inventories, the inability to break higher does not bode well,’’ Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC, has told Bloomberg. “Crude fails to break to the upside and you’re in a contango market, so risk is to the downside.”
Oil price volatility has returned to pre-crisis levels and nothing seems to jolt the markets into action at this point.
It’s been disheartening for the bulls that oil prices have failed to break out over the past few weeks despite a flurry of positive news including declining inventories and reports that OPEC+ producers have mostly been sticking to their pledged cuts.
And now the pendulum has swung to the opposite end and oil markets have to climb a new wall of worry.
After a brief, half-hearted rally, oil prices have dropped back to a familiar trading range in the low-$40s after the Labor Department reported that U.S. weekly jobless claims totaled 1.106 million last week. This comes just a week after the tally dipped below the 1M mark for the first time since March, thus raising serious doubts about the sustainability of the economic recovery.
“With all the bullish headlines that we’ve seen over the last weeks regarding inventories, the inability to break higher does not bode well,’’ Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC, has told Bloomberg. “Crude fails to break to the upside and you’re in a contango market, so risk is to the downside.”
Oil price volatility has returned to pre-crisis levels and nothing seems to jolt the markets into action at this point.
With no clear timelines as to when a viable and safe vaccine could hit the mass markets, the global economy and oil markets remain particularly vulnerable to the so-called second wave of Covid-19 infections. Indeed, last month OPEC+ expressed concern that the pace of the oil market recovery has been slower than anticipated due to the growing risks of a prolonged second wave of the pandemic.
#3. The renewables boom
When investors think of the oil-renewables nexus, they usually look at it in terms of how low oil prices might slow down the shift to renewable energy. Whereas that is true in principle, so far there is no evidence that low oil prices have negatively affected the momentum of renewable energy. On the contrary, the demand for renewable energy has continued to grow during the pandemic at a time when fossil fuels are facing their biggest demand destruction in history.
The ongoing wave of massive asset writedowns in the oil and gas sector is a clear indication that executives have finally acknowledged that ‘Lower Forever’ might be the new norm for oil as Shell CEO predicted three years ago.
The bulls might have the last laugh though: Sustained underinvestment in oil projects might actually lead to a supply squeeze down the line which could cause oil prices to spike.
By Alex Kimani for Oilprice.com
