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5 Market Catalysts Driving Oil Prices Higher

By Ellen R. Wald, Ph.D.CommoditiesApr 29, 2021 05:31AM ET
www.investing.com/analysis/5-market-catalysts-driving-oil-prices-higher-200576196
5 Market Catalysts Driving Oil Prices Higher
By Ellen R. Wald, Ph.D.   |  Apr 29, 2021 05:31AM ET
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An array of market developments and geopolitical catalysts are currently moving the price of oil higher. Below, the 5 key triggers:

1. Why Oil Prices Shot Up Wednesday Morning

After barely moving for most of the week, oil prices jumped by at least $2 on Wednesday morning.

Crude Oil Daily Chart
Crude Oil Daily Chart

The reason seems to be based on three factors:

The first is that the build in American crude stocks was well below estimates.

The American Petroleum Institute (API) predicted a 4.3 million bpd build in crude oil stocks in the U.S., but the Energy Information Administration (EIA) report on Wednesday morning revealed only a 98,000 barrel build.

Second, exuberance for summer travel is growing, and there is an assumption that oil demand and jet fuel demand will increase because of this.

Third, Goldman Sachs reiterated its prediction that oil prices will hit $80 per barrel this summer.

2. How India’s Coronavirus Situation Impacts The Oil Market

India is experiencing an exponential increase in coronavirus infections with new lockdowns impacting many parts of the country. India is the third largest petroleum consumer, after the United States and China. It imports almost all of the 4 million bpd of oil it consumes.

There was concern that the situation in India might hurt global oil demand, as lockdowns last spring caused oil demand in the U.S. and Europe to plunge. So far, however, Indian refiners do not plan to reduce their refinery runs substantially.

Rather, Indian refiners see a potential opportunity to export fuel products to other countries in the region if they aren’t consumed domestically, and so do not expect to reduce their demand for crude oil significantly.

3. OPEC+ Decides To Wait And See

OPEC+ was supposed to hold a full ministerial meeting on Wednesday to assess whether to proceed with the production increases it agreed to implement in May at its previous meeting. However, after the Joint Technical Committee (JTC) met on Monday and the Joint Ministerial Monitoring Committee (JMMC) met on Tuesday, the ministers unceremoniously moved their own Wednesday meeting to Tuesday.

Instead of the usual hullabaloo, Tuesday’s ministerial meeting was brief and lacked press coverage. OPEC+ did not change its forecast that demand is expected to rise another 5.9 million bpd this year, and the ministers simply reaffirmed their commitment to raising production 600,000 bpd in May.

OPEC+ plans to meet June 1 to reassess supply and demand, but if the group continues with its current plan, production will increase a total of 2 million bpd by the end of July.

4. Will Rising Gasoline Prices Pressure OPEC+ This Summer?

The question for analysts looking at the market over the next few months is whether an additional 2 million bpd by the end of July will be enough oil for the market. The EIA predicts that U.S. producers will add another 900,000 bpd over the rest of 2021.

However, producers are extremely hesitant to drill new wells in the U.S., even with WTI above $60 per barrel. (I wrote about this in more detail last week, but Wednesday’s earnings call from Bakken producer Hess (NYSE:HES) confirms hesitancy to add rigs this year. Hess is considering adding a third drilling rig in the Bakken if prices remain strong for the rest of 2021).

Many in the U.S. are also predicting that gasoline prices will rise this summer, and they forecast a national average to $3 per gallon. There are also signs that gasoline prices may increase due to issues unrelated to the price of crude oil.

The price of corn is rising, which will cause the price of ethanol to rise. Ethanol is a gasoline additive made from corn in the U.S., and it is mandated by law in most gasoline blends.

Also, a shortage of drivers for gasoline tankers could cause problems with gasoline delivery this summer. Regardless of the reason for rising gasoline prices, U.S. politicians have a habit of blaming OPEC.

In 2018, Saudi Arabia and Russia were receptive to pressure from the Trump administration to increase production when oil and gasoline prices escalated over the summer. Would the Biden administration also pressure them for lower prices, and would OPEC+ be receptive? Or would the Biden administration use higher gas prices to push its Green Agenda?

5. Oil Company Stock Prices

Q1 2021 is looking good for oil company stocks, though most of the profits are due to fluctuating circumstances. The companies took advantage of higher oil prices so far in 2021—which they must always do when prices rise—and they made money by trading oil and gas on the market. These successes are in contrast to what many oil companies are now touting as their futures.

Some companies, like BP (NYSE:BP) and Shell (NYSE:RDSa), have made significant public commitments to invest in green and renewable enterprises, but their strong showings this quarter are not due to these strategies.

BP, the first to release its Q1 earnings, beat analyst expectations with $2.6 billion in earnings, and CEO Bernard Looney talked up the company’s green portfolio during the earnings call. However, BP’s profits were largely due to higher oil prices and a good performance from its oil-trading arm. Royal Dutch Shell, which releases its numbers today, has also touted its green commitments. However, it has seen strong profits from its oil trading division.

Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) will release their Q1 earnings on Friday. Exxon, unlike BP and Shell, made significant cuts to its oil trading division in 2020. Until very recently, Exxon also resisted the focus on green and renewable strategies that BP and Shell have promoted heavily. It will be interesting to see if the decision to cut back on oil trading made a difference for Exxon in Q1.

5 Market Catalysts Driving Oil Prices Higher
 

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5 Market Catalysts Driving Oil Prices Higher

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Comments (6)
Ghoda Sandrokottos
Ghoda Sandrokottos May 04, 2021 9:54PM ET
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The world is reeling under the pandemic. The developing part of the world has taken a huge economic hit. At such times it is unfair for the OPEC+ to artificially jack prices by capping production. I suspect they could have bribed the US oil producers to delay & limit their production.
Terry Ely
Terry Ely Apr 29, 2021 2:13PM ET
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Very good information!
Paul Joshua
Paul Joshua Apr 29, 2021 12:27PM ET
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thanks
Sami Khan
Sami Khan Apr 29, 2021 12:19PM ET
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well thats very informative and make the picture clear. thanks
Jiacheng Liang
Jiacheng Liang Apr 29, 2021 6:31AM ET
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thanks Ellen
Waseem Waseemullah
Waseem Waseemullah Apr 29, 2021 6:31AM ET
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Fahmi Yazit
Fahmi Yazit Apr 29, 2021 6:28AM ET
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Less consumers yet price still up..how it helps ppl's economy during this hard time? Only cocern of rich ppl...and the big player..hollaaa.
 
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