Downside risks for oil early in the New Year

The start of the new year is bringing lots of optimism on the crude demand recovery front.  Crude prices have a lot of risk events to start the New Year.  The obvious risk is will OPEC+ be too aggressive in returning more crude to the market.  The other risk is will Democrats pull off a shocker and win both Senate races in Georgia, paving the way for a Biden administration to deliver more fiscal support that will send the dollar deeper into freefall and for a clean energy initiative that will curtail US production even further.

OPEC+ is dealing with a softer crude demand outlook to start the new year due to the highly anticipated post-holiday coronavirus spike.  Vaccine rollouts have not been as successful for most of the world and that does not bode well for the case to hike oil production by another 500,000 bpd in February.  The positive news for an improving crude demand outlook is China’s economic strength and cold winter that is driving strong demand for crude.

Over the weekend, OPEC Secretary-General Barkindo noted that many downside risks remain and that outlook for the first half of the year is mixed.  It seems that given the uncertainty to COVID and a slowdown with US production, OPEC+ should be willing to hold off any increases in production.  Even if the group decides to raise output again in February, downward pressure on crude should still be limited.

WTI crude was softer despite the strong dollar as the OPEC+ meeting showed the Saudis remained guarded and Russians were noncommittal.  It seems the Saudis are pushing to punt another increase in production and that seems what the energy markets are expecting.  Crude prices might still hold up if the group agrees upon an increase of less than 250,000 bpd in February.

By Ed Moya