WTI drops briefly back below $52.00 amid risk off market conditions

The front-month futures contract for the American benchmark for sweet light crude oil, West Texas Intermediary (WTI), has been on the back foot on the final trading day of the week. In early Friday Asia Pacific trade, WTI futures climbed as high as $53.81, not even 10 cents from the 11-month highs set earlier in the week at $53.90, but have seen substantial downside since then (in fitting with other risk assets). WTI has dropped all the way back to the $52.00 level and printed lows at $51.82. At present, front-month WTI futures trade around $1.50 or close to 3% lower on the day.

Demand concerns

European equity markets just closed with significant losses on Friday (Stoxx 600 -1.0%), weighed by news that distribution of the Pfizer vaccine on the continent will temporarily slow as the company upgrades its European production facilities is being cited as one factor that weighed on sentiment. Moreover, lockdown concerns are also there, with Italy set to toughen lockdown restrictions and Germany look likely to follow suit. Meanwhile, in a blow to airlines, UK PM Boris Johnson just announced the closure of all international travel corridors (i.e. country from which people can enter the UK without a Covid-19 test), amid fears of allowing in international variants.

The above-noted news seems to have weighed on crude oil markets through the channels of 1) concerns that the economic hit caused by lockdown will damage demand for fuel and 2) through WTI correlation to global equity markets (stocks are also lower elsewhere, such as in the USA).

US equity markets are also lower in what seems to be a “sell the fact” reaction to the announcement of US President-elect Joe Biden’s stimulus plan announcement (he announced a $1.9T “rescue” package including a $1400 top-up stimulus cheque for each American, as expected). This, combined with Biden’s “hawkish” tone on taxes (Biden impressed the need for all Americans to pay their fair share) is also being cited as weighing on sentiment and crude oil markets.

Markets still bullish

Note that despite recent downside (WTI has now slipped more than 3% from highs monthly highs close to $54.00), banks are still making bullish calls; JP Morgan is the latest to join the chorus and the bank expects prices overshooting $60 in the near term as the physical market moves into a deficit. With an additional 1M barrel per day in voluntary production cuts from the Saudi Arabians to take effect in February through March, and then expectations for a subsequent strong global rebound in economic activity as the Northern Hemisphere enters summer and major economies approach herd immunity versus the virus, most analysts agree that the risk of under-supplied markets in 2021 is far greater than oversupplied, thus the high degree of bullishness amongst most market participants.