4 Factors Affecting Oil Market Sentiment in the Short Term (Article)

In the short term, 4 major factors continue to influence oil market sentiment; Those factors are the hope for the emergence of a dovish axis role in the US Federal Reserve, and the expectations of China easing its strict restrictions to combat the Corona virus.

The 4 factors include: uncertainty over the European Union’s embargo on Russian oil, the price cap plan, and growing concerns about oil demand amid a global economic slowdown.

When activated, the first and second factors become bullish for oil, and whether they act individually or together; They have fueled rapid rises in the price of crude oil in recent days and weeks.

The third factor currently in play is supportive, albeit somewhat negative. It has so far contributed to the upward jumps in prices, but it seems dormant for the time being.

The fourth element represents a permanent undercurrent of the downtrend, but turns into an effective element in the absence of bullish catalysts.

Oil prices and economic growth

These factors have resulted in cycles of rapid gains in crude oil prices alternating with declines as optimism fades and global growth concerns come back into the spotlight.

Volatility impulses aside, on a daily settlement basis, Brent crude futures have been broadly confined in the $90-100 per barrel range for the past 3 1/2 months, and have been hovering around the 80s level during the few days they fell.

The few few days in which prices jumped over a century turned out to be sudden and accidental.

Given how high short- and medium-term uncertainty is on both the supply and demand sides, this is a relatively narrow range for Brent Crude.

lowest level in 7 weeks

Financial markets fully returned to risk aversion by the end of last week, amid renewed doubts about the Federal Reserve’s policy change, and optimism about the return of activity in China, last week, was ignored with the premature decline in crude oil.

The global economic slowdown and concerns about oil demand returned to play an influential role, and Brent and West Texas Intermediate prices settled at their lowest levels in 7 weeks at $87.62 and $80.08, respectively.

In turn, the decline in prices becomes a question about the uncertainty associated with the imminent embargo by the European Union against Russian oil; The reason why the market is worried about supply disruptions.

Starting December 5, the EU will stop all imports of Russian seaborne crude oil and ban its companies from shipping Russian oil to third countries and providing financing and insurance services for these exports.

The United States and the United Kingdom, which have halted Russian oil imports, will join the European Union in banning shipping and maritime services.

All three of these parties plan to exempt shipping companies and marine services from the embargo if the Russian oil export shipments that they deal with are dealt with at a certain price or less than the pre-determined maximum.

Moreover, the market is still awaiting important details on the price cap and execution mechanism and some news reports said on Friday 18th November that the price cap might be announced next week.

Even if this proves to be true; Implementation modalities may take longer to be developed and absorbed by market players.

Replacement shipping and insurance

One would have thought that the prospect of at least about 1 million barrels per day of Russian crude supply being disrupted, if not completely lost from the market, would send Brent above $100 right now.

A few market watchers and players are calling for Crude Oil to break above that psychological mark this winter, and this is not our base case.

And while such a hike is possible if, for example, Russia retaliates with a price cap by cutting its oil supplies or there are unexpected large supply disruptions elsewhere in the world, at this point, we don’t think that’s the case. inevitable.

And based on our conversations with stakeholders in the oil and shipping industry; The market is now confident that 1 million barrels per day of Russian seaborne crude, which the European Union will soon replace with other supplies, will find other buyers.

China, India and Turkey have increased their imports of Russian crude in recent months and can take in more, and smaller buyers such as Indonesia, Malaysia, Sri Lanka and Pakistan may join the buyers.

Unlike the case with Iranian and Venezuelan oil, the United States is not expected to impose sanctions on buyers of Russian crude.

Washington has repeatedly said it is keen to ensure that EU sanctions do not lead to any loss of Russian supplies and the resulting price hike.

This makes the availability of shipping and insurance services to buyers of Russian crude oil, outside the European Union and the Group of Seven, the main piece of the puzzle that needs to be solved, especially for major buyers China and India, which are not expected to join the “price ceiling alliance”.

Shipping is not seen as a big deal, and the influx of new Russian crude oil is expected to fuel the growth of the world’s “shadow fleet” owned by companies spread across a small handful of Asian and Middle Eastern cities that have been using sloppy old tankers in recent months.

Alternatives are available to the London-based International Group of Protection and Indemnity Clubs and Western Reinsurance Markets.

Liability coverage can be provided by fixed-premium clubs and general insurance companies in Russia or in oil-importing countries.

Insurance coverage may be low—usually around $500 million—compared to the up to $3 billion that the International Group Club can provide, and the shipowner’s liability limits are usually well under $500 million.

Although the availability of such alternatives is reassuring; A smooth transition from legacy to new systems cannot be taken for granted, entering the market into uncharted territory and even short-term supply disruptions can be costly.

* Vandana Hari is the founder of the Vanda Insights Center on Energy Markets.

*This article represents the opinion of the author, and does not necessarily reflect the opinion of the energy platform.