Search ForexCrunch
  • Thursday has been choppy given the strong dollar, but crude oil has nonetheless advanced and WTI hit highs above $56.50.
  • The backdrop remains bullish amid stimulus, vaccine & pandemic as well as supply-side optimism.

Thursday trade has admittedly been a little choppier, most likely given the impediments presented by the continued strengthening of the US dollar, but crude oil markets have nonetheless advanced; front-month WTI futures are up 1.1% and front-month Brent futures are up 0.3% as the second from final trading day of the week draws closer to a close.

Looking more closely at WTI; in the immediate aftermath of the CME pit open at 14:00GMT, there was a brief sell-off which saw WTI drop from above $56.00 to below $55.50. Most likely, there was some profit-taking as volumes picked up following the pit open. But crude oil bulls jumped in to buy the dip, pushing WTI to fresh post-pandemic highs above $56.50 at one point.

Bullish fundamentals

The fundamental picture for crude oil markets remains bullish, hence why traders were keen to clinch a bargain when WTI dropped below $55.50 on Thursday. Firstly, news flow coming from Congress continues to suggest that more US fiscal stimulus, and another hefty dose at that, is on the way. This ought to boost economic activity in the US (and world via increased import demand), which ought to boost fuel consumption. Meanwhile, data out of the US this week suggests that, actually, economic activity has held up better than expected in January. Strong ISM PMI reports, a strong ADP National Employment report and Thursday’s strong weekly jobless claims data all beat expectations; all point to a strong NFP number on Friday. Just as this has been positive for equity markets, it is being seen as a positive for crude oil markets.

Moving away from stimulus and the US economy for a second, pandemic news flow this week has largely been upbeat and last week’s concerns regarding vaccine distribution delays is in the rear-view mirror. Positive data on vaccine efficacy has instilled greater levels of confidence that vaccines will work, vaccination efforts in major economies have accelerated and infection rates in most countries appear to have peaked. Crucially, ahead of Lunar New Year holidays next week, China appears to have gotten a mini Covid-19 outbreak under control.

Supply-side factors are also looking bullish; data out this week suggests OPEC+ is showing good compliance and the cartel agreed to maintain current output cuts at a JMMC meeting earlier in the week. Leaked documents showed the cartel thinks (as its base case) that global crude oil inventories will continue to drop this year as the global economy recovers. In other words, OPEC+ seems keen to ensure that market conditions remain tight an conducive to higher prices.

Looking ahead, crude oil market price action is likely to retain a bullish bias so long as the news flow on US stimulus, vaccines, the pandemic remains good and as long as Friday’s official US labour market report isn’t an absolute disaster – though if it was, this would likely heap further pressure on Congress to deliver even more aggressively on stimulus, which, in the long-run, would more than make up for any economic weakness seen in Q1 2021.