OIL : Saudi Suprise

(Sun, 10 Jan 2021). The oil market has gotten off to a strong start to begin 2021 with Brent and WTI crude futures posting weekly gains of circa 6%. In turn, oil prices are trading at its highest level since February/March at $55 and $51 for Brent and WTI respectively. While the continued pick up in risk sentiment, bolstered by a Democrat sweep following the Georgia runoff elections, has supported oil prices, the main factor at play had been Saudi Arabia’s surprise decision to make a unilateral pre-emptive cut in oil production by 1mbpd (10% of current production) throughout February/March. As such, with OPEC de-risking downside pressures, the oil outlook remains bright, despite renewed lockdown measures amid the new COVID variant.

CRUDE OIL REPORTS TO SIGNAL SOFTENING DEMAND ON RENEWED LOCKDOWN

As we look to next week, broader risk sentiment will continue to remain play. Elsewhere, commodity indices have begun (Jan 8th) rebalancing to match updated target weights for 2021, which will continue through to Jan 14th. With that said, following last years sizeable 20% decline in oil, index investments in the complex is likely to have been below target by quite some margin. Subsequently, Citigroup has indicated that as much as $9bln of oil contracts could be purchased throughout the rebalancing, thus providing a tailwind. Aside from that, oil market reports from the EIA and OPEC are expected, however, they are likely to downgrade their demand outlook in light of the resurgence of virus cases.

OIL TECHNICAL SET-UP: BEWARE OF SHORT TERM PULLBACK

While the outlook remains positive for Brent crude futures, there are risks to be aware of in the short-term. The RSI has yet to confirm the higher highs in the spot price, highlighting a bearish divergence. Alongside this, key resistance situated at 55.90-56.15 (2019 double bottom) could see the oil uptrend pause for breath.

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