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The Oil Market looks like a giant V-Shaped Bottom

Following the turbulent year 2020, demand for oil has picked up strongly again since the beginning of 2021. At the end of September, the oil price climbed back above the 80 US dollar mark for the first time, since 2018. Due to the reopening of the economy, demand for the black gold is increasing in numerous countries.

Due to the demand shock caused by the Covid-19 restrictions and the subsequent global economic shutdown, the oil price reached a historic low in 2020. The US oil grade West Texas Intermediate (WTI) even traded in negative territory at times, down to -40 USD (!). The turbulent development of the oil price also impacted the business of the oil companies. For example, the American oil companies Chevron and Exxon each posted losses of 5.5 billion and 22.4 billion US dollars respectively. Similar observations can be made for European companies for the past year.

Oil price with powerful V-shaped recovery
After a stormy 2020, oil prices have recovered in the current year. The prices of WTI oil from the United States and Brent from the North Sea have even risen to multi-year highs in 2021. Since the beginning of the year, WTI prices have risen by around 72% from a low level and Brent prices by around 66%. From the 2020 low until today, the price of WTI Crude Oil rose by unbelievable 125 US dollars! Considering that the all-time high is 147 US dollars, this is insane.

WTI Crude Oil 1996-2021 with the Top in 2008 and Bottom in 2020.

Several reasons can be listed as explanations why oil prices have risen in the second year of the pandemic
First, an economic recovery has occurred, and in addition, the shortage of natural gas is leading to increased demand for other energy sources. The gradual reopening of the economy was driven by the approval of the first vaccines. As a result, existing restrictions have been gradually lifted, increasing the demand for goods and services, which in turn has boosted industrial production.

Furthermore, the oil countries’ production plan also plays a significant role. The Organization of Petroleum Exporting Countries (Opec+ member countries) was faced with the decision to increase the production volume and thus depress the price, or not to change the production volume and thus continue to generate revenue at a similar level. Opec+ decided that the current production plan would be maintained, which caused the oil price to rise further.

In early October, the U.S. Department of Energy announced that the Biden administration was considering tapping into the country’s strategic oil reserves to help relieve fuel prices. Shortly thereafter, the Department confirmed that there were currently no plans to use the strategic reserves. More fundamental pressure.

In addition to these factors, the current trend in energy prices is also playing a role. A long winter in Europe and Asia as well as the economic upswing led to increased demand for energy. This has increased the demand for raw materials such as oil and coal for the operation of power plants.

Moreover, it is technically likely that such a large spike into negative territory as we have never seen before and the fast recovery afterward attracts investors and traders who have pushed the price further upwards. I personally traded the WTI oil future on the most intense days in 2020 and was able to bring in over 100% profit despite initially high risk. A quick adjustment of my stop order allowed me to follow the strong upward movement completely without risk.

Can inflation push the oil price to a new all-time high?
The topic of inflation is taking an increased presence in global news coverage in 2021. The recent rise in consumer prices points to a general inflation of goods and services. Particular attention is being paid to central bank policies. The U.S. central bank FED reiterates the view that the inflation observed is only temporary and not permanent in nature. Rising energy prices nevertheless give cause for concern that the inflation currently being noted is not merely of a temporary nature.

Like many other countries, the U.S. Bureau of Labor Statistics publishes Consumer Price Index (CPI) data every month. Because of the size of the U.S. economy, the rest of the world pays attention to these data. This data shows the change in prices from the previous month and over a year for various goods and services. Over the past 12 months until September 2021, consumer prices have increased by 5.4%. The sectors that contributed the most to this increase were used cars (+24.4%) and energy (+24.8%). In energy, commodity prices were a particular contributor to the increase, rising 41.7%.

It is difficult to predict the next decisions of the central banks and OPEC. However, I believe due to the reasons mentioned above and the increasing inflationary pressure, that 2008 was the last time that new all-time highs in the oil market were this likely as they are today.

Investment opportunities
To participate in the performance of oil as a commodity, there are generally two options. On the one hand, an investor can invest in stocks of one or more oil companies, on the other hand, oil futures contracts offer direct access to the oil market. It is also possible to trade CFDs (Contracts for Differences) on oil futures.

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Hayato Ishikawa

Mr. Ishikawa has more than 25 years of experience in the financial markets, focusing on stocks, real estate, cross-asset risk hedging, and business founding. He is co-founder of a private investment group - specializing in the western pacific region and an independent analyst as well as business advisor. Mr. Ishikawa is known for bringing technical and fundamental analysis as well as sentiment into a coherent overall assessment - unbiased financial and political journalism made in Japan.
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