Beware the Bounce in Oil Prices

In early December 2020, the Covid vaccine news inspired oil prices to rally. However, over the short to medium term (over say the next 2 years) this rise is likely to be tempered given the present state of oil markets.

This is because we believe there are still fundamentals conspiring against a sustainable rise in crude oil prices. Looking forward, movements in oil prices will likely fluctuate and continue to be influenced by speculative COVID related drivers.

So what is the current state of the oil markets in terms of supply and demand for oil as a commodity?

Current supplies of crude oil inventories are still at historical highs and as such are sustaining downward pressure on crude oil prices. However, the following factors point to a supply reduction over time:

• industry reinvestment remains low with the major oil companies (‘majors’) more focussed on debt reduction and dividends (than increasing supplies through exploration).

• majors are consciously and publicly moving towards renewables.

• whilst the rig count (for sourcing supply) is rising, it is still well behind previous peaks.

In terms of demand, we note continued weakened global demand for oil, putting further downward pressure on future crude oil prices:

• the northern hemisphere’s usual strong seasonal demand has taken a hit from COVID weakened economies.

• demand is being eroded at the margin through government policy and public action.

What is the International Energy Agency’s (IEA) outlook?

The IEA recently downgraded its demand outlook by 1.2 million barrels per day for the fourth quarter of this year. “…a Covid-19 vaccine (is) unlikely to ride to the rescue of the global oil market for some time, the combination of weaker demand and rising oil supply provide a difficult backdrop” to the OPEC+ meeting. Unless the fundamentals change, the task of rebalancing the market will make slow progress.”

So then, what is the new norm then for oil prices?

In the short-term, crude oil prices are expected to be volatile around current levels with potential for further downside risk. However, we believe that a positive rally could be well placed for the second half of 2021 (on the resumption of the northern hemisphere’s Covid outcome improving naturally).

In times of fluctuating oil prices, what companies are investors considering?

If you are thinking of building your portfolio’s exposure when oil prices are fluctuating, we believe the following companies offer investors best value for money (at the time of writing this post):

Please contact our advisers if you would like assistance in optimising your trading outcome in these companies.

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