Key themes for the oil price in 2021

Since the lows in November 2020, oil spot and futures prices have staged a steady rebound to trade more than 60% higher over the last three months. The following looks to identify key catalysts and themes currently in play for the commodity, and assess whether the recent recovery is sustainable or not.

Oil prices look to Covid-19 vaccines, China and the US as demand side catalysts

The rebound in oil which commenced in the last quarter of 2020 has found the narrative around a coronavirus vaccine supportive of the move. As the efficacy of final stage vaccine testing from the likes of Pfizer, Moderna, AstraZeneca and now Johnson & Johnson have been revealed, so to has the suggestion that the global economic recovery could gain traction and drive demand for oil.

So far more than 80% of the vaccines application has gone to the three largest economies in the world, namely: the combined Euro Area (including the UK), the USA and China. Economic growth across most global economies did return in the third quarter (Q3) of 2020. China, the world’s second largest economy, managed to eke out a full year of economic growth in 2020 and along with India (who was severely affected by Covid-19) are expected to lead Asian demand for the commodity in 2020.

Recent inventory data out of the US has shown that draws on oil stockpiles by US commercial firms, have been larger than expected suggesting a rising demand from the world’s largest economy.

Oil prices assessing the outlook of OPEC+ production on supply

The Organisation of Petroleum Exporting Countries (OPEC) along with Russia and other non-member allies (OPEC+) have (early in the current new year) indicated there commitment to keeping oil prices supported by the curbing or maintenance of existing output reductions already in play.

The OPEC+ decision looks to see an oil deficit maintained in 2021. Recent suggestions from member and non-member firms have been that there has been a strong level of compliance with regards to the allocated curbs in effect.

Risks to the oil price forecasts

At the moment we are seeing both demand and supply side catalysts driving the price of oil higher, as hopes of a sustained economic recovery and lower levels of production could equate to a deficit of the commodity in 2021.

Risks for the recovery of oil could come from a disruption to the growth outlook, which could be brought about by another large wave of coronavirus infections across the world, or inefficiencies in vaccine production, application or an inefficacy in vaccines to ward off mutated strains of the virus. Recent news from AstraZeneca have already indicated failures against one of South Africa’s new strains of the coronavirus.

Non-compliance by OPEC+ members as well as a sudden decision to increase crude production could also have negative implications for the future price of oil. OPEC has in the past been aggressive in its pricing strategies to weed out competitors. A rising oil price does allow for more expensive drilling operations by competitors to become more feasible, in turn gaining market share and prompting reaction by OPEC+.

Brent crude oil – technical analysis

The price trend for the price of Brent crude oil remains up for the time being, as indicated by the channel drawn on the chart above. In the short term we have seen an aggressive continuation of this uptrend after breaking out of a short-term triangle consolidation. While $63.20 (channel resistance) and $64.70 (historical resistance) become future upside price targets for the commodity, the aggressive short-term move higher has pushed the price deep into overbought territory.

Traders respecting the uptrend but preferring not to chase the market, might prefer to wait for a pullback from overbought territory to find long entry into the commodity. A buyable pullback might be considered on a move back to a confluence of both horizontal and trendline resistance at $57.30. Should the oil price instead retrace further and break below the major low at $54.40, the bullish uptrend would instead need to be reassessed.

In summary

• Gains in the oil price have been supported by the anticipation of a global economic recovery fueling demand and further curb extensions from OPEC+ limiting supply
• US inventory data and Chinese economic activity evidence increasing demand from the two largest economies in the world
• Production curbs is said to be met with high levels of compliance amongst OPEC+ members
• A relapse in economic activity, non-compliance among OPEC+ members or shift in output policy could threaten the outlook for oil
• A technical analysis view of Brent crude oil suggests that the longer-term trend to be up, although traders might prefer looking at a short-term pullback from overbought conditions to find long entry

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