The Oil Market: Relieving The Pressure

The oil market seems to be releasing some pressure, reflected in prices with a decrease of around 7% yesterday. We see in this a temporary setback rather than a lasting one. Vaccine setbacks in Europe and rising Iranian exports do not change the outlook. The recovery of the Western world, the stimuli, the progress of vaccination and the supply restrictions of the oil nations still frame a bullish scenario in the short term. The oil cycle is well under way, but there should be some strength left for the summer months.

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The Oil Market Releases Pressure

The oil market releases some pressure after the relentless rally in recent months. Prices decreased 7% towards USD 63, after trading at around USD 70 per barrel in the previous sessions. Reports of rising Iranian oil exports, sneakily and against the sanctions regime, and setbacks in the European Union’s vaccination program apparently created some caution in the market. This raises the question of whether it is a temporary or longer-lasting setback.

Norbert Rücker, Director of Economics and Research for Next Generation at Julius Baer, considers that the oil market is in a temporary consolidation. The fundamentals are largely unchanged. Vaccine setbacks in Europe barely change the economic outlook. Iran‘s surge in exports is one of the feedback loops controlling a long-term rally, but only marginally offsets supply cuts from oil nations in the short term. Most importantly, the Western world’s oil demand appears to be returning to its previous levels thanks to the economic recovery, stimulus, progress in vaccination and the easing of measures against the pandemic. These factors seem particularly evident in the United States, which still accounts for nearly 20% of global oil use.

Travel Activity May Likely Cause A Rebound

The steep increase in travel activity during spring break in recent weeks offers a sign of the likely rebound to come in travel and leisure activities. Furthermore, the market mood gradually turned bullish, but the latest reading on futures positions does not offer clear signs of overheating. Sentiment and the oil price cycle are well advanced, but there should be some strength going into the summer months. The Swiss bank sees that oil prices can move beyond US $ 70 per barrel by the middle of the year.

Article by Norbert Rücker, Next Generation Director of Economics and Research, Julius Baer

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