Growing optimism, growing risks?

This weekly report is an excerpt from our Short-Term Outlook service analysis, which covers a period of eight quarters and provides monthly forecasts for crude oil, natural gas, NGL, refined products, base petrochemicals and biofuels.  Contact John Paisie (+1-832-517-7544 or E-mail) for the detailed analysis or for more information about the Short Term Outlook.


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The price of Brent crude oil closed last week at $64.63 after reaching $66.78 on Thursday morning, but was still up for the week by 2.73%. In similar fashion, the price of WTI closed the week at $61.66 after reaching $63.71 on Thursday morning for a gain during the week of 4.1%. The increases during last week returned the markets back to the upward trend that has held for most of the year.

The price of crude oil has been pushed upward by the growing optimism surrounding the reopening of the economies across the globe and the corresponding rebound in oil demand coupled with the effective management of oil supply. Other factors that are providing significant support are the accommodating policies of the central bankers and the expectations for further fiscal stimulus.

One growing concern is the risk of inflation and rising interest rates. The sharp upturn in the 10-year treasury yield is one reason for oil prices falling in the latter part of last week. The 10-year treasury yield reached 1.61% on Thursday before declining back to 1.38% by the end of the week. This is the highest level since early 2020 before the advent of COVID-19. The level of the increase is illustrated by the 10-year yield being at 1.13% on February 10, and at the end of last year below 1.00%.

We highlighted this concern in the economics section of last week’s report. We also pointed out that inflation can be a double edge sword for oil prices. Higher inflation will put downward pressure on the US dollar, which will provide a boost to oil prices. However, higher inflation will put downward pressure on US equities – and given the correlation between asset classes – will also put downward pressure on oil prices. Additionally, in reaction to higher inflation, the Federal Reserve could ultimately move to a less-accommodating monetary policy. While we expect some inflationary pressures along with the passing of the additional stimulus/recovery package, we do not expect that resulting inflation will be sufficient for the Federal Reserve to increase interest rates. Instead, we expect the Federal Reserve to continue to be accommodating to the point of letting inflation run for a period about the Fed’s 2.0% inflation target. Furthermore, if need be, we expect the Fed to take steps to keep interest rates from rising – including the increase in quantitative easing. This topic is further explored in the economic section.

Other developments to watch out for this week and in the near-term include the following:

  • The outcome of the upcoming OPEC+ meeting scheduled for March 4
  • Future direction of the potential negotiations between Iran and the US
  • The extent of the stimulus/recovery package that gets passed in the U.S. Senate
  • Any signs of more contagious COVID strains that are not mitigated by current vaccines
 
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