Oil stays on course in the recovery but faces some challenges
Crude oil prices managed to recover the largest part of the heavy losses that it incurred during the Coronavirus pandemic. Over the past year, Crude Oil began recovering but the way to a full recovery is still long and faces a lot of obstacles.
Global oil markets were amongst the first industries to be hit by the pandemic as oil is highly sensitive to all factors that influence supply and demand, such as geopolitical tensions, military conflicts, slowdowns or strong growth of economies, output or oil transportation disruptions and weather conditions.
Oil markets started to slump with the first signs of the virus outbreak in China back in January 2020, as the epidemic started to paralyze the economy of the world's second largest oil consumer, sending strong negative signals worldwide.
The panic selling started when the virus spread globally, hitting Asia, Europe and the United States, the world's number one oil consumer, with the COVID-19 pandemic causing an unprecedented slowdown in all economies.
Oil prices lost over 70% of its values between January and April 2020 and even hit the zero level at one point, due to huge supply and practically no demand, with oil distributors being forced to pay just for holding oil.
If we compare the current crisis with the 2007/2009 Great Recession, when the US West Texas Intermediate oil (WTI) spiked close to $150 per barrel in June 2008 and subsequently plunged to $33 per barrel in February 2009 (driven by a profit-taking from record highs after a multi-year rise and a recession) the pandemic lead to a stronger negative impact on oil prices, as they plunged to historical lows.
During the 2007/2009 financial crisis, economic activity was severely affected, leading to a wave of deflation, increased unemployment and reduced production which resulted in diminishing demand and pushing oil prices lower.
Governments employed stimulus measures to fight the financial crisis that reversed deflationary forces, lifted inflation and revived demand, helping oil market to recover.
A number of smaller oil refining companies collapsed during this period, but the crisis unmasked another important fact, that big refiners were able to survive the crisis with the minimum price of $15 per barrel, even though multiple companies started to complain and fear that they would be forced to cease operations since the oil price fell below $100 per barrel.
The COVID-19 pandemic has caused a historic slowdown in growth of the global economy and slashed the demand for crude oil but also hardly hit fragile economies of oil-exporting developing countries, which mainly depend on producing and exporting oil, as these countries were already in vulnerable positions, even before the global crisis caused by pandemic.
Oil prices regained traction however after the first and the strongest wave of coronavirus started to ease and global economies started to gradually recover, with focus on China which was hit first by the pandemic, but also the first to emerge from the crisis.
The latest economic data from China were impressive, showing that the economy is recovering at a pace higher than expected, despite the imbalance in recovery in other sectors of the economy.
Increased demand in Asia boosts optimism, along with promising economic data from the US and Europe, particularly the EU's largest economy - Germany, but the new wave of the coronavirus that keeps the most of Europe under restrictive measures, tempers optimism.
The rollout of the COVID-19 vaccine has helped to improve global sentiment significantly and boosted expectations for accelerating economic recovery, although the activity in the global services sectors which includes air transportation, one of most important industries with high oil demand, with levels below 70% since a year ago- is still weak and expected to take more time to start recovering.
Other important factors that played a key role in stabilizing oil prices were efforts of main oil-producing nations to limit production.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies (group known as OPEC+) have extended their oil production deal in attempts to speed up recovery of the oil market due to the coronavirus, with the biggest contribution to the action coming from the cartel's formal leader Saudi Arabia which made an extra cut of production.
The WTI oil price has recovered to its pre-pandemic levels after hitting an all-time low last year, surging to a 14-month high near $70 per barrel in early March.
OPEC's improved outlook for 2021 boosts expectations for further recovery but concerns on the slowdown in vaccinations and prolonged lockdowns in numerous countries warn that recovery in global oil demand faces headwinds.
Technical studies on weekly and monthly charts are in bullish setup and supportive for further advance, as the price of oil which is currently riding on the third wave of a five-wave cycle from a record low at $6.52, is focusing a psychological $70 barrier and a Fibonacci 100% expansion at $70.93, violation of which would open way towards key mid-term resistance at $76.88, October 2018 high.
On the other side, daily technical indicators started to point lower, signaling a weakening of bullish momentum and suggesting that bulls are taking a breather and will take some time to consolidate / correct recent strong gains.
With an overall picture from both fundamental and technical sides, being positive, according to the current situation, further recovery in global oil prices can be expected in coming months.
This article was submitted by Windsor Brokers.