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  • See-saw price action continues in crude oil markets, which has sharply risen from Thursday’s sub-$57.50 lows to above $61.00.
  • Geopolitical and Suez Canal blockage concerns are being cited as driving prices higher on Friday.
  • But the OPEC+ meeting and global Covid-19 third wave will be the main drivers of sentiment next week.

See-saw price action in crude oil markets, the story of the week, has continued on Friday. After dipping all the way back to within a whisker of weekly lows under the $57.50 mark on Thursday, front-month WTI futures contracts have seen a sharp recovery back above the $61.00 level. That means on the day gains of over 4.0% or about $2.40. However, WTI still looks likely to post a decline of about 50 cents or just under 1.0% on the week.

Note that the last seven-session have seen crude oil markets trade with a much higher degree of daily volatility than usual. In the last seven sessions crude oil has dropped 7.6%, then risen 3.2%, then dropped 0.2% (the least volatile day, this Monday), then dropped 6.4%, then rallied 6.0%, then dropped 3.9% and now is up over 4.0% – typically daily percentage change volatility is significantly less than this.

Driving the day

Geopolitics may have come to the rescue for crude oil markets, which had been looking at steep losses midway through Thursday’s session. An Iranian missile was fired at an Israeli ship in the Arabian sea on Thursday, news which prompted some positive ticks in the oil complex. Elsewhere, there has also been plenty of focus on reports that Yemen’s Houthi forces continue to attack Saudi Arabia; the Houthi’s said they had launched assaults on Saudi Aramco (the country’s state-run oil producer) facilities in Ras Al-Tanura, Rabigh, Yanbu and Jizan, as well as against military sites in Damam, Najran and Asir. The Middle East remains (as ever) a tinder box, and as the frequency of attacks on Saudi facilities increases, geopolitical risk premia will likely support crude oil.

Market commentators are also citing newswire reports that the Suez Canal could remain blocked for at least one more week – recent reports from AFP suggest that the latest attempt to re-float the ship have failed. Note that some desks have argued that this news ought not have too much of an impact on crude oil markets given that there are pipelines that run parallel to the canal, meaning the flow of oil can continue.

The coming week

Looking ahead, one of the most important drivers of crude oil prices next week will be the OPEC+ meeting on 1 April (next Thursday). As noted above, recent higher than usual levels of crude oil market volatility might well continue heading into the meeting as various OPEC+ sources leak the varied viewpoints of cartel members going into discussions; most agree that another hike in output at this point is unlikely given 1) the above-mentioned demand concerns in Europe and elsewhere and 2) the recent sharp drop in prices from monthly highs (WTI currently trades more than 13% below its March high of just under $68.00) – OPEC sources said on Wednesday that a rollover of current production levels is the most likely outcome.

Another important driver of crude oil prices will be the trajectory of the pandemic; tougher lockdowns in mainland Europe amid the EU being hit hard by the third wave of Covid-19 infections have been attributed as the number one reason why crude oil markets have corrected lower from earlier monthly highs. But some desks are now flagging concerns about third waves elsewhere; cases are at record highs in Brazil and India. Cases are also showing early signs of rising in the US, with the 7-day moving average of newly reported infections up 7% on the week to 57K.

As is the case in the EU, the US is struggling to contain the spread of the more virulent UK (B.1.1.7) variant of the virus, which now seems to be driving the spread. The key difference between the US and EU however is the US vaccine rollout has gone very well so far and the hope will be that even if there is a third wave, the fact that the country’s most vulnerable have been vaccinated will prevent hospitalisations and deaths from rising sharply in the coming weeks/months – if that is the case, recovery may remain on track.