Crude Awakening

After beginning 2021 at below $49, U.S. crude oil prices soared past $75 a barrel by mid-July. Reopening demand was outpacing supply increases from the Organization of the Petroleum Exporting Countries and other producers. People were talking about $100 oil on the horizon.

Then, despite increasing vaccinations, the Delta variant of Covid-19 pushed cases higher and more governments, companies, and individuals began to change their plans. Delayed travel and returns to the office mean less flying and driving. Generally, people staying put more means less demand for oil, gas, and jet fuel.

The price of West Texas Intermediate crude oil had dropped to just above $60 a barrel by last week, down 20% in little over a month.

Here's Barron's Avi Salzman writing today:

For much of the past year, oil has moved on two factors: the spread of Covid-19 and the decisions of OPEC and its allies about whether to increase or decrease production. In January, OPEC decided to keep production low, and in July announced that it would slowly restore production to the market over the next year. The group is not set to meet until next month, so there has been a lull in guidance since last month’s meeting.

In the past two weeks, Covid-19 has continued to spread in several countries, and appears to be depressing gasoline and jet fuel demand. That helped drive the selloff in crude. But data out of China shows that that country was able to stop the spread of Covid through more aggressive lockdown measures, and travel is picking up. 

That has restored some optimism to the oil price. WTI crude is up almost 9% over the past two days, back up to around $67.50. That's thanks to a mix of better news on the Covid-19 front, plus the market's greater confidence that supply won't meaningfully outpace demand in the near term. That's keeping oil prices aloft, according to Avi.

He writes:

Jeffrey Currie, the head of commodities research at Goldman Sachs, argued in a note published Monday that the selloff was overdone in part because supply has stayed low. In general, Currie believes that producers are investing too little in new projects today to catch up to future growth, and that means prices are likely to rise.

He expects the Delta variant 'will prove to be a transient event, and that U.S. producers will retain their newfound discipline, as the drivers of our bullish view shift from cyclical demand impulses to the structural binding constraints of underinvestment in supply that were only accelerated by Covid-19.'

Goldman Sachs' Currie has a target of $80 a barrel for WTI crude at the end of this year. That would mean another wild swing in from here in just a few months.

Read the rest of Avi's oil market reporting here.