US equities were little changed overnight as most reflationary assets took a breather. Investors naturally thought it worth reducing some equity market risk after the recent volatility in rates to take a more in-depth peek into the looking glass.
But the primary structural themes of more fiscal stimulus, an accommodative Federal Reserve, and vaccine optimism confirms that everything should eventually come up roses.
With that said US markets are off early session lows with the guiding light now getting carried by crude prices as we emerge from this winter of despair, the hope of spring should prove eternal especially for oil prices.
Adding to the positive cross-asset vibes, and on the vaccine front, Europe is only a few weeks behind the US. There is no evidence that new strains compromise protection against severe illness and positive signs that consensus is shifting to re-opening once the most vulnerable are protected.
Some pause for the reflation/re-opening trade is healthy. And without question, it is immeasurably tricky for investors to take that next leap of faith higher, especially at the index level with so many mixed signals enveloping the ongoing rotation trade.
Oil continues to gain
The American Petroleum Institute (API) reported a decrease of 3.5 million barrels of crude from US inventories. That print will not dissuade oil prices from heating up further as Brent goes “up up and away “pushing through $61 and keeps climbing floated higher by vaccine and stimulus balloons.
There is seldom one sole factor at play at any given time whether it’s the oil curve offering up and attractive alternative in the chase for yield or oil contracts providing a favourable inflation hedge after all at every market street corner discussions around inflation protection continues to resonate.
A neat feature of the oil market is that it is cyclical. It does tend to gather momentum. And it rarely if ever settles into a comfortable equilibrium as we saw from overnight price action.
But it might become more apparent that OPEC sees US$60 as the low end of the price range that incentivizes sufficient new production capacity to the market offering attractive producer returns.
I, however, see the March 4 March OPEC+ meeting as a risk to the current view at which time I expect Saudi Arabia’s unilateral Feb/Mar cuts to be rolled back.
Comments by Trafigura’s co-head of oil trading suggests real physical demand is underpinning the market, which is the best signpost and the most pro bullish reflection for oil prices as total cargo orders supplants any forward-looking glass view.
By the same token, while inventories are dropping, OPEC+ keeps an unusually high production capacity from the market, mainly via the latest Saudi Arabia February and March production curtailment.
While this gets echoed as a game-changer, I suspect oil bulls will be sitting with fingers and legs crossed that the OPEC meeting in March, which is likely to take on a higher level of importance than usual, continues to see member producers setting political difference aside and continuing to work in a coordinated effort to sustain elevated prices despite the obvious temptation to up production.
Saudi Arabia will roll back their curtailments while verbally climbing down on post laggards to make up for production overshoots from their prior commitment. But a Saudi Arabia rollback is not going to change the oil view at the more significant picture level.
As Brent prices rise above USD 60/bbl, there is little reason to doubt that demand fundamentals will justify further recovery in oil prices to long term equilibrium of USD 65/bbl and likely beyond by year-end as we are just starting to rev up the reflation trade engines.
For the oil market, we could be entering the most hyperinflationary stimulated market in what might be dubbed the “Year of Brent” (oil) where we would be looking back at current $60/bbl levels with a nostalgic yearning from possibly $80 /bbl in June-July if OPEC continues to keep a leash on production and the US dollar corporates by weakening off as it’s supposed to.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi