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  • WTI trades with mild losses on Monday though is off $51.50 lows having managed to recover back above $52.00.
  • Helping keep the downside to a minimum was a bullish call from Goldman Sachs.

Front-month WTI crude oil futures contracts trade with mild losses on Monday, though are off $51.50 lows having managed to recover back to the north of the $52.00 level as the US trading session got underway. At present, WTI is roughly 0.75% lower or down about 40 cents. In the broad scheme of things, WTI currently trades little more than 50 cents away from its highest levels in nearly a year and, though there are a few factors that could be argued to have weighed on the complex today, profit-taking with crude oil at elevated levels is likely as good of an explanation as any.

Crude oil fundamentals

Markets are in a defensive mood on Monday; the S&P 500 is 0.7% lower, the Dollar Index is 0.4% higher and in the G10, risk-sensitive currencies (CAD, AUD, NZD) are underperforming, as are industrial commodities. A few “explanations” for today’s defensive tone have been bandied about; 1) an unwind in overweight risk on positioning (profit-taking in “frothy” stocks, risk FX and commodity longs, as well as in USD short), 2) Covid-19 concerns (new variants reported in Japan and rumours in the US and talk of tighter lockdowns in the UK and Germany), 3) US/China concerns (after the US moved to normalise relations with Taiwan and reports emerged suggesting the US is mulling further “action” on China) and, finally, 4) rising US bond yields attracting flows from other assets classes.

Number two might well have impacted crude oil markets if it does ultimately lead to tighter lockdowns in the two of the world’s largest economies (Japan and the US), while lockdowns in Europe of course will also be unhelpful to near-term demand. But the Saudi’s seem to have successfully pre-empted any near-term demand risks in the decision last week to announce a voluntary 1M barrel per day output cut in February and March in order to ensure markets don’t get oversupplied. This is certainly one factor keeping a floor under crude oil markets on Monday.

Meanwhile, helping keep the downside to a minimum was a bullish call from Goldman Sachs; the bank sees Brent (currently trading at around $55.50) hitting $65.00 by the midpoint of this year and a “sharp demand rebound”, six months earlier than their previous call for Brent to hit $65. Following Saudi Arabia’s aforementioned surprise decision to slash another production over the coming two months, Goldman noted that March production levels by the OPEC+ group will still be near the recent lows just even as global demand starts “rebounding sharply driven by warmer weather and rising vaccinations.”

Goldman continues that “with vaccines being rolled out across the world, the likelihood of a fast-tightening market from 2Q 2021 is rising as the rebound in demand stresses the ability of producers to restart production”. Elsewhere, there was another bullish call last week from UBS, who raised their forecast for Brent crude to $60/b by mid-2021, also in reaction to Saudi Arabia’s production cut move.