Oil volatility is back

Oil prices are expected to trade under pressure this week following a US move requesting major countries to release crude from strategic reserves to cool global energy prices ahead of major oil producing countries’ meeting in December.

Analysts and market insiders expect that oil may slip to $75 a barrel as governments from some of the world’s biggest economies said they were looking into releasing oil from their strategic reserves to bring down the prices. On Saturday, Kyodo news agency reported that Japan’s Prime Minister Fumio Kishida signalled his readiness to counter oil price hikes by releasing oil from its reserves for the first time to curb surging oil prices.

Last week, oil prices closed on negative note as benchmark US crude oil for December delivery fell $2.91 to $76.10 a barrel on Friday. Brent crude for January delivery fell $2.78 to $78.46 per barrel — its lowest since early October — as a fresh surge in Covid-19 cases in Europe threatened to slow the economic recovery while investors also weighed a potential release of crude reserves by major economies to cool prices.

Brent has surged almost 60 per cent this year as economies bounce back from the pandemic and the Organisation of the Petroleum Exporting Countries (Opec) and allies, known as Opec+, have only raised output gradually. In Europe, Austria to enter full lockdown next week while Germany also warned that it may also have to move to a full Covid-19 lockdown.

“The (oil) market still remains fundamentally in a good position but lockdowns are now an obvious risk... if other countries follow Austria’s lead,” Craig Erlam, market analyst at Oanda, said in a note.

Oil volatility is back

Crude oil traded comfortably above the $80 per barrel mark during November 2021 despite higher volatility that came as a result of pressure on Opec+ producers to raise output to put brakes on surging prices and ease global inflationary pressure,” Junaid Ansari, head of investment strategy and research at Kamco Invest, said.

“Reports also showed that in order to reduce pressure on oil imports, the US may release oil from its Strategic Petroleum Reserve and that it could do so in coordination with other oil importing countries, including Japan. The recent strength in USD that traded at a 17-month high level also had a somewhat downward pressure on crude prices,” Ansari said.

Oil demand remains strong

“Oil demand remained strong across markets and reached near pre-covid levels at 101 million barrels per day, according to the CEO of commodity trader Mercuria Energy. However, he added that prices may not hit $100 per barrel as the current oil market has significant spare capacity with Opec+ and the possibility of US adding another one million barrls per day would prevent oil price reaching such levels.

“These comments were in line with that of the chief executive of the world’s largest independent oil trading company Vitol Russell Hardy who said that oil demand is expected to reach even higher levels next year and would exceed 2019 levels in first quarter of 2022,” Ansari said.

Oil on slippery road

Ehsan Khoman, director, head of emerging markets research for Europe, Middle East and Africa, at MUFG Bank, said oil prices have slipped to the lowest in nearly six weeks as traders weigh the odds of a joint stockpile release from the US and China following the Biden-Xi virtual summit earlier this week.

“Whilst a coordinated move would be price bearish, as we recently catalogued such a stockpile releases will only be a temporary and modest relief given SPRs are stocks not flows. We remain tactically neutral for the week ahead given the counterbalancing forces of Opec+ remaining resolute to not hike more than its pledged levels; potential coordinated SPR releases, and; the return of Iranian barrels. We view these forces will increase oil price volatility as trading liquidity recedes into year-end,” Khoman said.

“Our near-term constructive oil price conviction remains intact given the acute market deficit (which we model at -1.8 million barrels per day in fourth quarter of 2021), will not pivot into oversupply until second quarter of 2022. Our pricing models signal Brent ending Q4 2021 and Q1 2022 at $85 and $82 per barrel, respectively. Thereafter, with the market expected to return to a mild surplus, leads us to be tactically bearish with a leg lower to $74, $72, and $66 in Q2, Q3 and Q4 of 2022, respectively,” he added.

Speculation about a US stock release has already pushed oil prices down by about $4 a barrel in recent weeks and additional supplies of up to 100 million barrels are already priced in, Goldman Sachs oil analysts said in a note.

As a result, it said any release “would only provide a short-term fix to a structural deficit”.

Opec+ has stuck to its policy of gradual oil output increases even as prices surged, saying it expects supply to outpace demand in the first months of 2022. The group plans to meet on December 2.

— muzaffarrizvi@khaleejtimes.com