Wallstreet finally loves oil again
The black gold is back in the focus of large investment corporations.
Crude oil has had a great 2021 so far - a very different situation than last year, when the pandemic destroyed demand for all commodities and triggered a price drop that lasted well into 2020. Now the raw materials are back with full force, and nowhere is this force more evident than with oil. Crude oil has become the hottest commodity for traders in the past few weeks as rising demand has exceeded all expectations and sparked a run on oil futures. According to a recent report in the Wall Street Journal, the ratio of bullish to bearish bets on oil in New York was a staggering 23 to 1 in mid-June, compared to 6 to 1 at the beginning of the year. This is the speculative component of the price rally, and it is certainly a large component. But the fundamental component is also an important factor. OPEC + stunned everyone earlier this month when it failed to reach an agreement on how to proceed with production control beyond the current month. The UAE, a deviator who had already criticized some aspects of the production cut agreement, got it right this time and refused to make any concessions until concessions were made to them. The latest news on this front is that the oil cartel members have not made any progress on the deal, according to unnamed sources familiar with the situation who spoke to Reuters this week. The sources said Russia tried to bring the UAE and Saudi Arabia to the negotiating table together but apparently struggled to succeed, making a new OPEC + meeting this week unlikely. Meanwhile, however, headwinds have also been at play with renewed concerns that the delta variant of the coronavirus could reverse the global economic recovery that fueled the surge in oil demand that few had anticipated. Because of these fears, Reuters reported Monday, oil prices started the week in losses, albeit a minor one, of less than a percentage point for both Brent Crude and West Texas Intermediate. Oil traders took profits on the stock market. This has also weighed on oil prices. According to Reuters' John Kemp, hedge funds sold a total of 34 million barrels of WTI and 5 million barrels of Brent and 14 million barrels of US gasoline last week. The sell-off, Kemp said, came by closing 55 million barrels of bull positions rather than opening bear positions, suggesting sentiment remained broadly positive. However, according to the Wall Street Journal, there could be a ticking bomb hidden beneath all of these oil bets. That ticking bomb would be the option many traders have been betting that the price of oil will hit $ 100 by the end of 2022. Analysts are concerned that a reversal in the price of oil would result in a sell-off of options, which, given the size of the options market for oil, would send ripples across the financial markets right now. In fairness it has to be said that the chances of a sudden drop in oil prices are less than they would normally be during a rally, mainly caused by a supply shortage. Usually higher prices lead to higher production. This time, however, no higher production is to be expected. Shale oil producers in the United States are particularly cautious and in no hurry to produce too many barrels. Supermajors are targeted by activist shareholders to reduce, rather than increase, their production. There is Iranian oil that many expected a quick return to legal global markets a few months ago, but it seems like it will be a while before Iran and the United States seal an agreement that does so would make possible. The wild price spikes are likely to continue as speculators try to make the most of the oil rally.