The Swing of Things

Oil prices continue to swing wildly on a weekly and even daily basis. Caught in cross-currents between supportive fundamentals and concerns about the spread of the Covid-19 pandemic, buffeted by developments in currency markets, and subject to a seeming existential dread plaguing the macroeconomic environment, oil keeps gyrating, with a ceiling in the low $70s range that seems unyielding. In a statement that could serve as a summation of any number of trends nowadays, Mike Tran of RBC Capital markets said that oil prices “will remain, for now, stuck in a period of trendless rangebound volatility.” The past two weeks serve as a case in point. The week ended Aug. 20 saw a dramatic slide in oil prices, informed in part by a dismal set of pandemic-related headlines and a stronger dollar (PIW Aug.20'21). Analysts say a strong greenback tends to weigh on crude, rendering the dollar-denoted commodity less affordable. And Covid-19 has a more direct impact -- lockdowns and travel restrictions impede fuel consumption. This week, however, saw crude come rocketing back. Benchmark Brent climbed back over $71 per barrel after dropping under $66 last week. The key drivers of the rally have been the same culprits behind the slump: The dollar is weakening, and US regulators’ approval of the Pfizer vaccine has spurred hopes that more people in the world’s largest economy will get the shot. Amid pandemic uncertainty, escalating geopolitical instability, a fast-moving energy transition, and maneuvering by central banks at a delicate time, each rally is met with fears that the market is overbought, while each sell-off leads to players buying the dip. There is little indication the dramatic price action will disappear, although the scale may be less intense. Trading volumes tend to thin in late-summer as many market players take vacation, which can amplify price movements. But the main drivers will remain present; the pandemic is far from under control, and with the US Federal Reserve signaling willingness to taper its bond purchases, traders will continue to focus on currency for cues. From a fundamental perspective, oil is supported. The global market looks set for continued inventory draws through the end of the year. Even a sale of some 20 million barrels from the US Strategic Petroleum Reserve is unlikely to disrupt these projections. And while Opec and its allies are opening up the taps, from a seasonal perspective much of the incremental crude -- especially in the Middle East -- is likely to be used domestically. But seasonal impediments loom as the fourth quarter approaches. Refiners in the US are set to enter seasonal maintenance. US demand -- and as a consequence, refinery throughputs -- have outperformed those elsewhere in the world. As the US downstream scales back its recently rising throughputs, refiners elsewhere, especially in Europe, are unlikely to pick up all the slack. And because demand overall remains under pressure, a squeeze in products is not forthcoming. Indeed, US driving season has played its usual key role in mopping up gasoline and incentivizing higher utilization. But it, too, is coming to an end.