- WTI is back below the $61.00 mark and down about 40 cents or 0.7% on the day.
- Stock market downside, downbeat jobs data and India lockdown concerns all weighed on Thursday.
- A bullish EIA report has taken the edge off of losses, however.
After a stunning recent run to the upside, crude oil markets have come off the boil a little on Thursday; front-month futures contracts for the delivery of West Texas Intermediary (WTI), the US benchmark for sweet light crude oil, are back below the $61.00 mark and down about 40 cents or 0.7% on the day.
Driving the day
Crude oil markets hit session highs above the $62.00 mark during the Asia Pacific session, but have since been on the back foot, seemingly mirroring price action in global equity markets. Global stocks have been somewhat unnerved by recent price action in US government bond markets; nominal and real yields have been on the rise (the 10-year US TIPS yield is up more than 11bps on the week) and some fear that bond markets might have entered into a “taper tantrum”, i.e. bond markets aggressively pricing in the withdrawal of central bank bond-buying programmes (which by their very definition push bond yields artificially lower, so their withdrawal tends to see bond yields shoot higher back to their “real” level).
Anyway, taper tantrum fears are a threat to the stock market’s massive yield advantage over the bond market (something which investors call TINA, an acronym for There Is No Alternative to investing in stocks). Given crude oil’s correlation to stocks, any taper tantrum-related stock market downside also poses risks to crude oil.
Elsewhere, weekly jobless claims data from the US was a disappointment and the US labour market appears to still be in pretty rough shape in the second month of 2021. However, poor data (combined with recent adverse weather events in the South) ought to increase the pressure on Congress to “act big” with the next round of fiscal stimulus and the Fed to maintain its ultra-dovish monetary policy stance (which ought to be positive for crude oil in the long run). Other US data releases on Thursday were mixed, with the Philly Fed Manufacturing Index pointing to strong manufacturing sector activity in February.
Finally, regarding potential factors weighing on crude oil sentiment on Thursday; talk that India might implement a fresh lockdown amid rising Covid-19 cases and positivity rates in some areas are a reminder that the nature of the demand recovery remains fragile. Any virus-related setbacks that keep major oil-consuming economies in lockdown (or indeed send them back to it) has the potential to derail the crude oil market rally.
A bullish weekly EIA inventory report helped crude oil recover from session lows in the $60.30s; headline crude oil stocks saw a much larger than expected draw of over 7M barrels, confirming Wednesday’s similarly bullish Private API report as accurate. Distillate stocks also saw a much larger than expected draw of 3.4M barrels.
The data was collected in the week up to 12 February and so does not reflect the impact of recent weather-related disruptions to US output and refining activity. On which note, Texas entered the sixth day of its “big freeze” on Thursday. Blackouts in the largest energy-producing state in the US have taken out about one-fifth of the country’s refining capacity and closed oil and natural gas production. SEB thinks that “the temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected”. Though a little lower on the day, WTI is still up nearly 2% on the week, with US disruptions having been this week’s main talking point.
The big picture
If crude oil markets do close in the red on Thursday, this would only be the third day of losses this month, during which time WTI has surged more than 17% from around $52.00. As to why crude oil markets have been able to post such impressive gains in recent weeks; reflation/recovery hopes have been boosted in recent weeks as vaccine rollouts ensue, the US government moves towards further fiscal stimulus and central banks remains highly accommodative has boosted the demand side of the picture for crude oil, while continued OPEC+ flexibility and cooperation (coupled with additional voluntary cuts from the Saudis) has kept crude oil market conditions tight through the Northern Hemisphere’s winter Covid-19 wave. With the impact of recent weather-related disruptions to US production now seemingly set to last longer than previously anticipated, this adds further reason as to why crude oil prices can continue to rally in the coming weeks.
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