The price of oil has been heading higher. Since early November, coinciding with the election of President Biden, the benchmark West Texas Intermediate Crude has risen from $40 per barrel to about $58 per barrel, an increase of 45%. The futures market for crude oil is complicated and time will tell where it goes from here but there are several reasons why we are seeing the bulls run in the oil market, and they are fundamental rather than technical reasons.
Change in US Policy
Andrew Hecht of SeekingAlpha.com is my favorite source for information on the oil market. He says, and I agree, that it is no coincidence that the recent rally started at the same time Biden was elected. Biden and the Democrats’ stated policy is to start to move the US away from dependence on oil and toward renewable energy sources. One of his first acts as President was to cancel the Keystone XL Pipeline. While this new policy may prove to be good for the environment in the long run, the problem in the short run is that we are still mostly dependent on oil and gasoline to run our cars. Government policy may be able to turn on a dime but people can’t just ditch their gas-powered cars as quickly. Moreover production of alternatively-powered cars is not sufficient to accommodate a wholesale change in transportation.
Covid Vaccine
At the same time we are at the beginning of vaccinating our population. Over the next several months, more and more Americans will be immune Covid and our economy will open up as a result. People will go back to driving again, perhaps not as much in aggregate as before but sufficient to cause a significant jump in demand for oil products over where we are today. Same with airplane travel and jet fuel. Oil investors look at where we are in our recovery and project that oil will be more expensive in the future.
Falling Dollar
The US Dollar has also been declining in value relative to other currencies during the same period. The world pays for oil using US Dollars, and if the value of the Dollar falls, it takes more Dollars to pay for a barrel of oil.
OPEC Plus Russia
At the same time, OPEC and its new best friend Russia seem to have gotten their act together and have held production steady, at between 6.7 an 7.7 million barrels per day according to Andrew Hecht. Coalitions within OPEC have been notoriously difficult to keep together and so history would tell us that OPEC likely won’t continue to hold the production line, but so far it has. With supply holding steady and demand likely to increase in the near term, Econ 101 says the price of oil goes up and will continue to go up. This is also where a change in US policy hurts. US production can be the second derivative that could cause world oil prices to hold steady or even decrease despite OPEC’s policy of holding production steady. However, if our country is now in a mode of cutting or at least making production more difficult through increased regulation, it will be difficult for oil investors to view the US as helping the situation of oil production.
IMO
Those of you who drive a Tesla or other electric care may not care as much any more in a direct sense, but there is a chance here that rising oil prices could really put a squeeze on our economy’s ability to recover from the Covid shutdown. As Dave Matthews says, Funny the Way It Is: it was only 10 months ago, in April 2020, that we saw the price of oil drop to below $0, meaning the seller paid you to take a barrel of oil. Now we are up near $60 and perhaps heading to $100 or higher. I believe the price of oil is more likely to move higher from here than lower because of all of these factors I have outlined. These are all fundamental factors, not technical factors, which means that the rally in oil prices is more likely sustainable. Let’s look to see to what extent US production really does level off, and also how long OPEC can keep its production as it is before raising it. Otherwise we could have much higher prices at the gas pump.