The price of oil rebounded 6% yesterday. Traders reacted to news of a stricken ship that is blocking the Suez Canal, a crucial supply route for oil tankers. However, this rebound in the price is already being pounced upon as an opportunity to sell with a tide of recent selling in oil as fears over demand have developed.
- Suez traffic jam impacts on oil supply, but should be only a short term factor.
- Oil is still in a broader corrective phase as the outlook for demand is negatively impacted by the 3rd wave of COVID infections in Europe.
- Despite this, looking further out, the longer-term picture remains constructive for oil, as the global economy eventually kicks back into gear following the pandemic.
Traffic jam in the Suez Canal drives near term oil rebound
The latest news in commodities markets is that a container ship has run aground in the Suez Canal. Coming in such a tight section of the canal (some sections can be as little as 205m wide), with the ship being stuck sideways, no other cargo ships can pass. Satellite photos show the scale of the problem.
The result is a massive backlog of ships (around 50 ships pass through the section every day). Around 12% of global trade (mostly between Europea and Asia) use the route and around 9% of oil carried by sea tankers.
The knee-jerk reaction to this near term supply shock has been a jump in the oil price. However, we see this as being very quickly digested by the market. Already we are seeing oil falling back again today as more considerable medium-term factors remain important.
The caveat to this is that the blockage takes longer to resolve than the few days expected by the market. This may then add a premium to the oil price and add further support.
The medium-term outlook is still impacted by European 3rd wave
Despite yesterday’s jump in the oil price, for the past few weeks, there has been a corrective move in oil. Brent Crude has pulled back over 10% from the $72 high of early March. This comes amidst a re-assessment of the demand outlook.
With a sluggish roll-out of COVID 19 vaccines, European countries are now facing another wave of rising infections and hospitalisations. Many countries are stepping up lockdown measures again. European involvement in the global economic recovery from COVID is being put on ice. Expectations of the timing for a recovery in oil demand are being re-assessed.
On the technical analysis, this has resulted in a decisive breakdown of the 4 monthly recovery uptrend. Key support at $62.150/$63.00 has been broken. The 21 day moving average (which has been a great gauge for Brent Crude for the past 10 months), has turned lower. Furthermore, the RSI momentum indicator has also turned corrective below 50.
If the market trades consistently below $62 then a deeper correction is likely. Corrective retracements of the 4-month bull run could see a pullback into the $54.50/$57.50 old January trading band.
Longer-term we retain a constructive outlook for oil amid pandemic recovery
Whilst there is scope for this corrective move to pull Brent Crude back into the mid-$50s, this would likely be an area where the bulls see longer-term opportunities again.
A European 3rd wave will gradually be contained as vaccine roll-outs become more widespread. This will allow the US, Europe, and China (the three major economic regions) to fire on all cylinders of a post-pandemic recovery later in 2021. This will drive strong demand for oil and support the price for upside moves once more.