Crude can hit $50; pullback a buying opportunity: Navneet Damani

Crude oil has been on a roll as prices rose to a nine-month high, rising for the fifth straight week with support from an OPEC+ deal and hopes of another US stimulus.

Investors piled into oil after OPEC+ managed a production hike without disturbing the bull sentiment. The oil market seems to be taking heart from OPEC’s discipline with production in times like this—agreeing to a 1.5 million barrels per day (mbpd) hike instead of a 2 mbpd jump initially feared.

Vaccine optimism supported the expectations of a healthy demand outlook for 2021 as vaccine makers worked on supplying as many doses as possible before the end of December.

OPEC+ will assess market conditions on a monthly basis before deciding on a higher supply. Under the deal, the maximum the group can ease per month is 500 mbpd. Investors cheered the decision as OPEC+ needed to avoid a taper tantrum, so a small hike in January was acceptable to the Saudis.

A monthly increase of 500,000 bpd in January will replace the 1.9 mbpd increases decided earlier. Another positive was Iran’s tacit agreement to go with any deal struck by the OPEC+, though it won’t have an active role given the Trump administration's sanctions against the country .

Yet, uncertainty prevails over the eventual cooperation by members of the group (UAE and Saudi) which came after days of dissent.

Continuing optimism about a possible oil market recovery in H1 2021 is largely based on the thinking of OPEC leaders, such as Saudi Arabia, and an uncertain view on the positive effects of a COVID-19 vaccine on the global economy.

The economic effects of a global vaccination, which will likely take 6-18 months due to logistics and financial restraints as well as political strategies, are going to be minimal in the short term.

Government budgets have been hit, the burden of cuts is not being equally divided among OPEC + members and multiple participants are increasingly unwilling to comply. There are signs of increasing dissent in the group as the desire for new revenue streams grows stronger.

In a positive sign, Saudi Arabia raised oil prices for customers in the main market of Asia, the biggest in five months, indicating that the country is confident of global energy demand to be strong enough to absorb the small boost in output from OPEC+ members next month after optimism over vaccines caused crude to rise to an eight-month high last week.

Asian countries coming out of this situation for several months has been the one bright spot. The trend is likely going to continue and be the biggest single driver of demand, at least in the short term.

Markets are overlooking the extremely high oil storage level, which has only partially decreased due to high refinery runs. When looking at the demand for petroleum products, however, there is an imminent threat of a storage buildup.

The rally in headline crude prices isn’t a welcome sign for everyone. Europe’s oil refineries are struggling to pass on the higher cost to buyers as they face weak demand due to the pandemic. In the US, the combined refining margin for gasoline and diesel remains near $9 a barrel, the lowest in a decade for this time of the year.

Outlook

Crude markets are riding on a sentimental boost of vaccine which might bring back travel and normal life and lead to a recovery in fuel in 2021. This can lead to markets experiencing some choppy session, as several uncertainties remain. But, prices can go looking towards the $50 or above, and that short-term pullback should be seen as a potential buying opportunity.

That said, OPEC+ efforts to bring a balance in markets needs to continue to ensure cohesion in what may be a challenging period between now and April 2022 when the agreement expires.

Any short-term oil demand recovery by vaccine does not necessarily imply a corresponding improvement in fundamentals despite the fact that OPEC producers have successfully slashed oil output to the lowest level since 2002.