Why The Outlook For Oil Prices Shifted This Week

A couple of weeks ago, I wrote here that crude was stuck in a range and would probably remain so until something drastic happened to change fundamental conditions and expectations. I also said that until that came, I would be trading with a long bias, which worked out pretty well. Over the ensuing week, CL gained around 8%...

This week, however, has been a different story. It started out okay, with CL bouncing off a lower opening to consolidate those gains, but that all changed on Tuesday, when oil dropped on a report of progress with a proposed piece of legislation in the US Congress. That legislation, known as NOPEC, would make OPEC subject to American anti-trust law, raising the prospect of the cartel being sued for propping up oil prices.

As appealing as that is to someone who believes in the power of free markets, the legislation itself means very little. US courts would have no power to enforce any ruling against an international organization like OPEC so, like a lot of things political, this is about pandering, and empty gestures more than it is anything powerful, or useful. Still, there are reasons to believe that an increased chance of NOPEC passing, along with the Biden administration’s focus on climate change and green energy this week, could be the kind of game-changer that I talked about two weeks ago.

As I said, NOPEC doesn’t pose any real, long-term threat to OPEC, but given current circumstances, it could prove to be the beginning of the end for OPEC+. OPEC+ is a coalition of unlikely partners in some ways, united by a desire to keep oil prices high. Outside of that common bond, though, there are huge differences. There are some members for whom controlling the price of oil is less about money than it is about potentially damaging America, and the events this week will have emboldened that faction.

They will point to the NOPEC legislation and say “See, America is out to get us any way they can. Why are we propping up oil, even as they increase output, and thereby benefitting their oil industry?”. That will be a hard argument for the less hardline members to counter. The irony, of course, is that the legislation is designed to lower the price of oil, and even though it is essentially toothless, it may end up doing just that if the reaction plays out that way.

Even if things don’t turn out that way though, we may be seeing a quite significant shift in crude right now for other reasons.

Airline earnings this week weren’t too bad overall, but there was some pessimistic commentary regarding international and business travel, even as far out as until the end of the year. That generally indicates that travel in general, an important part of oil demand, is still suffering and recovering only slowly. Add in the fact that Covid-19 and its many variants are proving to be a tougher foe than anticipated and the strong recovery in oil demand that we have seen recently may stall out before too long.

Then there is the potential long-term impact of Joe Biden’s Earth Day pledge to cut US emissions by 50% by 2030. Once again, this is politics more than anything. The shift to EVs in the US that accelerated so much under the last, pro-oil President will take care of a lot of that, as will a cost-driven shift towards alternative energy use for electricity generation. Still, keeping the subject in the spotlight can’t help but put some pressure on crude.

Overall, the conflicting influences that have kept oil rangebound are still there. Demand is increasing, but so is supply, despite OPEC+ sticking to their guns. The US, Canada, and other non-signatory countries are increasing output to take advantage of rising prices, which seem to be offsetting the recovery. What we have seen this week, though, is a shift away from a position where the major risks were things that would create a shock to the upside to the exact opposite. The risk now is to the downside, so I will be switching to a short bias in trading for a while and as the focus shifts to those potential issues, a test of the lows looks likely. That is why I will be shifting to a short bias in crude for the next week or two at least.