The Crude oil prices have been on the rise for over a month, which is all the more impressive considering the dollar getting stronger in that period as well. Interestingly, this rise has coincided with both OPEC and the IEA cutting their forecasts for demand growth. So, what’s driving crude prices, and are we looking at a new peak or is WTI at $80/bbl in the cards?
The thing is, there hasn’t been any one, big thing that we can pin the latest rise on. After hitting a short-term bottom in the first half of December, crude has generally been trending higher ever since. Around that time was the Fed’s meeting in which it enacted a “hawkish cut”, reducing interest rates by a quarter of a point but projecting fewer cuts next year. Crediting the Fed for the move seems to not really hold water, particularly since the Fed is contributing to a stronger dollar.
Putting the Pieces Together
The Crude oil prices might have generally benefited from end-of-year optimism, but if that were the case, it should have reversed course this week. Instead, it has accelerated, suggesting that there are underlying issues which have investors buying up oil. One of the key events is the changing of US Presidencies.
On the way out of office, President Joe Biden is beefing up sanctions on Russia, implying less production reaching the market. Meanwhile, the incoming administration is said to be working on immediately implementing sanctions against Iran’s exports, threatening as much as 1 million bpd of supply.
It’s a Supply Problem
Last year, oil prices fluctuated around concerns or confidence in global demand. Investors seemed to be more comfortable with expectations that supply would remain relatively stable. It takes time to bring significant new production online, the countries that could produce at capacity already were, and OPEC+ wasn’t changing its production quotas. One unexpected change was the unusually cold winter in Europe that drove up demand for energy, while also reducing the output of wind farms, driving down natural gas stocks in the continent.
But the shifting geopolitical landscape has turned attention to supply. It’s not certain how Trump will deal with the Russia problem. In an effort to secure a quick ceasefire in Ukraine, Trump might be willing to leverage oil production to get a favorable result. That could range from severely ramping up sanctions in order to prevent Russian sales and push up the price of crude. To striking a deal with Saudi Arabia to increase production, driving down the price and starve Russia’s finances which are in desperate need to supply the war effort. No one really knows at this point how that could play out.
Rising to the Uncertainty
The Biden administration also recently announced banning offshore oil drilling. But the effect is likely to be minimal, since the new Trump administration can change the policy with an executive order. In the meantime, stockpiles of US crude and distillates have been declining in the wake of a cold snap affecting most of the country.
With Trump talking about buying or otherwise annexing Greenland and Panama, investors seem to be betting on increased geopolitical uncertainty. Which can potentially buoy The Crude oil prices – at least until January 20th when we find out what Trump will actually do on “day one”.
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