Oil: The risk of a downward correction is substantial - ABN Amro

FXStreet notes that the price of oil has already risen to over $55/barrel for Brent and $51/barrel for WTI after OPEC, together with its partners led by Russia (together OPEC+), has agreed on a new production level for the months of February and March. Nonetheless, strategists at ABN Amro do not expect oil prices to rise much further in the short-term as the risk of a downward correction is substantial. 

“The first serious resistance level is around $60/barrel. Only when the Brent oil price drops below $46.50/barrel, the positive sentiment will reverse.”

“The weaker dollar and the expectation that the economy will receive an extra boost from financial support programs by governments and central banks are also seen as factors that could support the oil price even further. The economic stimulus packages will indeed lead to higher economic growth. The question is whether this will have a strong effect on the demand for oil from the current level.”

“The demand for oil will indeed increase as the economy opens up further. The main drop in demand for oil is seen in aviation. Even now that the vaccination program has started, it will still take a long time before aviation gets back on track. The market's expectations with regard to the expected recovery in oil demand are well ahead of reality.”

“OPEC+ will produce 7,125 mb/d less in February than before the corona crisis, and 7,05 mb/d less in March. This means that the supply on the market is reasonably in line with current demand. Global inventories are still above average. But just as important is the fact that this production capacity can be deployed fairly quickly as soon as there is room for it. Russia, in particular, is keen to increase the oil production of the OPEC+ as soon as demand actually picks up and/or the oil price rises. This limits the upward potential for the oil price.” 

“The market is currently long positioned (speculating on price increases). And although there is still room for further expansion of the position, we do not think there is currently any reason to do so. Much of the positive news has now been priced in.”