Crude oil gained a little under 5 percent in November over the last month. Usually, a change of this magnitude does not warrant attention, but these are unusual times. Both, the Brent and WTI hit an eight-month high in the last week of November, yet oil is struggling to breach the $50/bbl barrier. Such was the spectacular nature of the oil price crash in 2Q of this year – as the market continues to be skeptical of oversupply and demand fears.
The November rally is significant because the crude oil breached the critical 200 day moving average after a very long time. Recall that the rally has been built on the news around the coronavirus vaccine, which in turn is expected to expedite the demand resurgence. That said, soft demand from most Asian economies, coupled with the raging second wave, which has sent many countries with significant demand into other lockdowns – is playing up against the bulls yet again.
The assertion that it could take another year for a vaccine to be well and truly available on a large scale could dampen the hopes of quick revival in crude oil prices. The more important developments surround the powerful Opec cartel, which is believed to be at the brink of extending the production cut deal for another three months and to delay the quota relaxation for production cuts.
The last-minute postponement of the Opec meeting sent panic signals to the market, which was expecting a smooth event. It is still highly likely that the Opec will be able to flex its muscles to secure a deal regardless of the delay, but this does not necessarily trigger a bull rally. That is because the event has by and large priced in the recent rally alongside the demand revival hopes.
Should there be an unlikely scenario of the deal not materializing, the downside could be massive. There is little room on the upside as things stand, as most observers continue to paint a bleak picture of the demand affairs for at least two more quarters. Don’t be surprised if crude oil never finds $50/bbl again in many a month to come.