WTI consolidates under $53.50, just below annual highs in the $53.90s

Crude oil markets trade on the front foot on Wednesday, though have largely failed to take advantage of a recent improvement in risk appetite that has seen US stocks surge since the open and the US dollar fall, particularly against commodity FX. At present, WTI is trading just to the south of the $53.50 mark, having failed an earlier attempt to test or exceed recent annual highs in the $53.80s and $53.90s. The front-month futures contract for the American benchmark for sweet light crude still trades more than 0.7% or over 40 cents higher on the day, however. Looking ahead, while crude oil is set to continue to takes its cue from the markets broader appetite for risk (eyes on US President-elect Joe Biden’s inauguration for more clues on fiscal stimulus etc.), the release of private inventory data, which is coming a day later than usual given Monday’s US public holiday (it was MLK Day), will be closely eyed as a proxy indicator for recent fuel demand.

Risk appetite on the front foot

Markets have maintained Tuesday’s upbeat bias for a second day, with a strong injection of risk appetite coming into play in recent trade; US equity markets, industrial and precious metals have all surged in recent trade as the US dollar has fallen. A more optimistic than anticipated Bank of Canada rate decision seems to have been the trigger (with strength in CAD seemingly triggering strength in other risky currencies and assets).

Whilst the most recent move in CAD in wake of the BoC might have been the initial catalyst for the recent surge in risk appetite, it most certainly is not the overarching cause; analysts continue to point to Tuesday’s testimony to the US Senate Finance Committee from US Treasury Secretary nominee Janet Yellen, where the former Fed Chairwoman urged Congress to act big with regards to fiscal stimulus and to worry about the debt later, as expected. Markets seemed to like her tone regarding how pandemic relief should come first and tax increases (primarily on the wealthy and corporations) should come later. Expectations seem to be that the Fed will continue to soak up all of this additional government debt issuance in the secondary market, evidenced by how nominal yields have hardly moved over the past few days (10-year yields started the week and still trade close to 1.10%), while real yields have dropped and inflation expectations have risen.

But crude struggles to squeeze out further gains

As noted above, WTI has failed to rally in recent trade in line with the likes of the US stock market. Somewhat dampening sentiment towards the crude oil market and likely preventing WTI from being able to surge above the $54.00 level on Wednesday has been the imposition of further economic restrictions in Europe; German Chancellor Angela Merkel formally announced tougher restrictions on Tuesday evening (European time), while the PM of the Netherlands has introduced a new curfew to take effect from Friday, coupled with a ban on all non-Schengen area flights from 23 January. Concerns regarding the outbreaks in the US and China also linger (29 million people are currently under lockdown in China, which had been largely virus-free for most of the last six months and had helped to power the H2 2020 economic recovery.

Vaccine news has been good, however; the WHO plans to approve several Covid-19 vaccines from Western and Chinese manufacturers in the coming weeks and months, reported Reuters citing an internal document, as it aims for rapid rollouts in poorer countries. As far as developed markets who are already well into their mass vaccination efforts are concerned, this ought to be seen as a positive given that the faster the international community comes together to reduce global Covid-19 numbers as much as possible, the less scope the virus is given to mutate and potentially render current vaccines less effective.