WTI slips back from highs after eyeing $51.00, risk on conditions remain supportive

Crude oil prices have slipped from highs in the $50.90s in recent trade amid what appears to be some profit-taking after a strongly risk on day. WTI still clings onto gains of more than 20 cents on the day or 0.5% and still trades above the $50 level. Bulls will be eyeing a test of the $51.00 level imminently.

Risk on factors helping oil

Markets are in a broadly upbeat mood in wake of the Democrat’s surprise sweep in Georgia. As a reminder, the Democrats won both of the Senate seats that were up for grabs, netting themselves 50 seats in total for the next Congressional term versus 50 seats held by the Republicans. In case of a tie, Vice President-elect Kamala Harris will have the decisive vote, so the Democratic Party is now seen as in control over what legislation can pass through the US Congress.

Stocks are higher (FTSE World Index +1.2% and S&P 500 +0.9%), as are bond yields (the US 10-year has moved above 1.0% for the first time since February 2020). In G10 FX, risk-sensitive currencies (AUD, NZD) are faring better while safe havens such as CHF and JPY are doing worse. Meanwhile, the US dollar has seen a mixed reaction and currently trades marginally higher close to 89.50 (in the Dollar Index or DXY).

All this risk on seems to be a reflection of a market that is betting on a stronger US (and global) economic recovery in 2021 and beyond, given expectations that the Democrats who control Congress will pass significant additional fiscal stimulus measures over the coming months.

All of this is being taken as a plus for global crude oil demand in 2021 and beyond. Concerns regarding the near-term outlook for crude oil demand seem to have been forgotten, as WTI continues to grind higher towards the $51 level after breaking above $50 level for the first time since February on Tuesday.

Concerns about a near term decline in oil demand (in the US at least) appear to have been overdone according to the latest official inventory numbers, which showed a much larger than expected draw in US inventories.

Note also that supply-side factors are also helping the upside; the Saudi Arabian announced a surprise 1M barrel per day output cut for February and March, seemingly to ensure that if the Covid-19 crisis continues to worsen in the Northern hemisphere (meaning more lockdowns and less fuel demand), oil markets don’t become oversupplied in the coming months.

WTI key levels