When news of how potentially devastating COVID-19 could be started spreading in February 2020, oil prices were at $53/barrel. This was prior to the OPEC+ price war between Russia and Saudi Arabia that occurred in March and resulted in Saudi Arabia drastically increasing oil production after Russia refused to reduce output. We all know that COVID-19 and the OPEC+ price war eventually ended up attributing to NYMEX crude oil prices trading negatively in April, but here we are back at $52.60/barrel at writing. Now what?
Not only do we have oil prices back at pre-pandemic highs, but we also have equity prices at all time highs, the sell-off in the dollar index stabilizing at 90 and the federal government discussing a third pandemic relief stimulus package. Basically, we’ve had a tremendous recovery and now there is beginning to be a lot of “bubble” talk in the equity markets. However, the world is in a structural recovery, central banks have pledged to support assets, and more spending is on the way. The most important inflection point, outside of a black swan event, is the U.S. Federal Reserve and its interest rate policy. As of now, chairman Jerome Powell has painted a picture that the earliest they will consider raising interest rates is 2023. Until that time, you cannot earn much of a return on cash deposits or bonds, so the natural asset classes to allocate capital towards are equities, commodities and residential real estate (maybe commercial real estate once we put this pandemic behind us).
How does this affect oil prices and the path forward you may ask? Some technical analysts think we are consolidating here and then will march higher towards $61/barrel. This very well may happen as a lot of hedge funds are positioned for that amidst the recovery environment as described previously. But, that does not mean we are not susceptible to any pullbacks that will most likely mirror the equity market. We’ve had a few minor down days in January and they’ve proven to be buying opportunities. Any future significant downturn in oil prices will most likely be the same.
If you want to take advantage of any dips in oil prices, please contact your representative here at Guttman Energy to do so!