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The latest crude oil analysis: will the momentum last?

15:00, 3 February 2021

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The rally in crude oil prices that started in April last year is still going strong. This year, the West Texas Intermediate (WTI) has already gained 12 per cent while Brent has surged 12 per cent. Oil prices have risen because of the ongoing Covid-19 vaccinations, US inventories drawdown, and the recent decision by Saudi Arabia to voluntarily slash production. 

In this WTI crude oil analysis, we take a look at the recent price action and conduct a technical overview of the commodity.

Crude oil analysis: why oil price bounced back in 2020

The price of crude oil has made a substantial recovery since March 2020. During this period, WTI moved from sub-zero to above $50. Similarly, Brent, the global benchmark, rose by almost 200 per cent.

This price action was attributed to several factors. First, while China was the original source of Covid-19, the government managed to control the economy well. In fact, the country of more than 1.38 billion people recorded 85,000 cases and less than 5,000 deaths. As a result, China managed to have a quick recovery in the second quarter. This was accompanied by record oil imports as the government embarked on a plan to boost its reserves. 

Second, at the height of the pandemic, OPEC members and its allies decided to cut the output. In July, they slashed oil production by 9.7 million barrels per day. At the same time, many US shale producers went out of business. In total, the number of active oil rigs in the US fell from more than 600 in January 2020 to a multi-year low of 272. 

Third, the US dollar has declined against most currencies in 2020. The Dollar Index (DXY) declined by 13 per cent between March 20, 2020, and January 6, 2021. A weaker US dollar is usually better for dollar-traded commodities like oil because it indirectly increases demand. 

Further, hopes of a Covid-19 vaccine and the eventual recovery of the global economy helped push the price of oil and other commodities higher. Also, the record stimuli in the US helped to boost sentiment in oil markets.

The latest oil price analysis

This year, the price of oil has risen because of the ongoing Covid-19 vaccination programme. Countries including the US, Australia, UK, Russia, and China have rolled-out massive vaccination campaigns. Other nations have already bought millions of doses of the vaccine. Therefore, investors believe that more vaccinations will lead to more demand as people start to travel.

Further, the recent decision by Saudi Arabia to voluntarily cut one million barrels of oil per day have also boosted the sentiment. The country will continue cutting production until March. Further, there are rumours that Joe Biden is considering cutting military supplies to the country. Saudi could retaliate by cutting more output and punishing the US with higher oil prices. 

The price of crude oil has also risen because of the recent trends in US inventory numbers. According to the Energy Information Administration (EIA), oil inventories have dropped in five of the past seven weeks. Another report by the American Petroleum Institute (API) shows that the inventories have fallen in four of the past seven weeks. A drawdown of US inventories is usually bullish for oil prices.

A closer crude oil price analysis shows that the recent election of Joe Biden has some positive factors for the commodity. Analysts expect that his administration will be different from that of Donald Trump, who used a light-touch approach to regulations. More regulations could curtail US shale production and transportation, which is a positive thing for the price of oil.

 

The perspectives: what will drive the WTI crude oil forecast?

While the oil price has risen, there are several risks that lie ahead. First, the number of coronavirus cases is rising around the world. In the UK, the government has announced a major seven-week lockdown. Other European countries have announced some restrictions. 

In the US, many states like California are also implementing travel restrictions. Joe Biden has banned flights from some countries. Similarly, the number of cases in China has also been rising in places. In a recent report, analysts at the EIA lowered their oil demand forecast by about 300,000 barrels.

Meanwhile, US producers are coming back as evidenced by the recent oil rig count numbers by Baker Hughes. The total oil rigs have risen to 295, which is higher than last year’s low of 272. The number has risen in each of the past few weeks. High rig count tends to point to higher oil production, which can have an impact on oil prices, especially in a period of tepid demand.

Further, some of Joe Biden’s policies could lead to more supply in the long term. For example, he has pledged to rejoin the Iran Nuclear Deal. To do that, he will need to remove some of Trump’s sanctions, which could lead to more oil supplies. Therefore, these factors could push the price of oil lower later this year.

Crude oil forecast for February 2021

Will oil prices rise in February? February has started well for the commodity. The price of WTI has risen to $55.10, which is the highest it has been since January 2020. Similarly, Brent has soared to $57.90, the highest level since February 2020. 

This performance is partly due to the relatively strong manufacturing PMI data from Europe, Asia, and North America. Also, the rebound of global equities and signs that the number of people being vaccinated is rising has helped the rally.

According to Long Forecasts, the price of WTI will likely end the month at about $56.76. The analysts believe that the price will continue rising and ultimately end the year at $77.32, which is about 40 per cent above the current level.

Another prediction by Wallet Investor expects that WTI will rise to $56.72 on February 16 and then end the month at about $54.76. 

Technical outlook: will crude oil jump in February?  

So, is WTI still in an uptrend and will the gains hold in February? On the daily chart, the WTI crude oil broke out above the important resistance of $54.12 on Tuesday. Previously, the price had struggled to move above this level and it is a sign that bulls are now in control. Also, the 50-day and 100-day exponential moving averages have already made a bullish crossover while the price has moved above the 78.6 per cent Fibonacci retracement level. 

Therefore, in February, the price will likely continue rising as bulls target the resistance at $60. However, a drop below $51.73 will invalidate this trend. 

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