Oil prices hit a two month high driven by tight supply

On January 11, international crude oil prices rose sharply. The settlement price of the main contract of us WTI crude oil futures was US $81.22/barrel, up US $2.99 or 3.82%, and the settlement price of the main contract of Brent crude oil futures was US $83.72/barrel, up US $2.82 or 3.52%. Oil prices hit a new high in nearly two months. Market participants generally expect that the mutated virus Omicron has a limited impact on the global economic recovery, but the oil supply is still tight, superimposed on investors’ belief that the Fed is not as good as the expected hawks, and the oil price rebounded sharply.


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Tight supply expectations and rising risk appetite are good for oil prices


Previously, affected by the significant increase in new cases of mutant virus Omicron, oil prices fell for two consecutive days. At present, the main game point in the market is whether the impact of the epidemic on demand recovery is serious or not. Although Omicron virus continues to spread and the number of newly infected people has increased sharply, it has been detected that it is not as destructive to human body as expected, mostly mild diseases. The market generally bet that it has a limited impact on the global economic recovery.


In addition, at the macro level, the current performance of the Federal Reserve is relatively hawkish. The latest news, US Federal Reserve Chairman Powell said on the 11th that the Federal Reserve may raise interest rates more times and reduce its balance sheet earlier and faster to deal with the continuous situation of high inflation in the United States. However, this did not change the market risk appetite. On the 11th, the stock market and oil market both rose strongly, mainly because the market generally believed that the Fed might not show its hawk card in actual action. Under the severe background of the epidemic, the U.S. economy is still relatively weak, which was also confirmed by the irrational employment data.


What is more important is the tension on the supply side. The current policy of the organization of Petroleum Exporting Countries and its allies (OPEC +) is to gradually restore the oil production stopped during the epidemic by increasing by 400000 barrels / day month by month. In fact, OPEC + production is limited to a certain extent, and the supply growth is relatively slow. On the one hand, it is disturbed by the political factors of internal member states, and on the other hand, it is limited by budget tightening. This was fully illustrated by the previous political turmoil in Kazakhstan and the decline in Libyan crude oil production. In addition, the continuous decline of U.S. crude oil inventory also triggered supply concerns. API crude oil inventory decreased by 1077000 barrels in the week of January 7. It is generally expected that the U.S. Energy Information Administration (EIA) data on Wednesday still point to the decline of crude oil inventory.


Future risks are still focused on the uncertainty of the epidemic situation and the demand of the United States


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First of all, the performance of US crude oil inventory data in the week before the festival was not ideal, especially the unexpected surge in gasoline inventory, reflecting that the US economy is still relatively fragile. Previous surveys showed that U.S. crude oil inventories may continue to decline last week, but gasoline and distillate inventories may still increase significantly. API also showed that U.S. refined oil inventories accumulated significantly. At present, the market is paying close attention to the release of U.S. Energy Information Administration (EIA) data.


In addition, the epidemic is still the biggest obstacle to economic recovery, especially the uncertainty it brings. Optimistic expectations may only be temporary. In the long run, the economic recovery is still shrouded by the epidemic, which puts pressure on oil prices.


On the whole, the business community believes that with the continuous rebound of oil prices, the risk of high accumulation is also increasing. In the short term, affected by tight supply, oil prices may still rise. However, in the medium and long term, it is difficult to continue the sharp rise of oil prices under the background of the tightening of monetary policy of the Federal Reserve and the severe epidemic situation.


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