Crude is back

By Marius-Cristian Frunza
Weekly Briefs

2020 was a rough year for everybody, but especially for the energy sector. The pandemic’s first wave has almost destructured the oil market, the crude oil futures trading at negative prices in April 2020. While most analysts predicted a gloomy future for the leading commodity, crude oil made a silent and robust recovery. What are the main consequences of this rebound, and what can retail investors expect in the near future?

Oil prices encompass three main driving factors: economical, financial and geopolitical.
The series of lockdowns hindered the demand for oil and oil distillates. Moreover, shale oil explorations are not profitable when prices are low and unstable. Therefore, oil production stopped in most US-based drills, while other traditional reserves closed due to high maintenance costs. If a surge in demand occurs in the foreseeable future, prices could follow a sudden increase amid limited supply capacities.

Oil markets are since 2008 financialised, banks and investment funds having significant positions in both physical and futures markets. Stock market prices go through substantial inflation amid an unprecedented quantitative easing channelled into the market by financial institutions. What if the very same financial institutions inject a chunk of this liquidity into the oil market?  Under such a scenario, oil prices could explode and generate an energy crisis similar to the 1970s. Is this a scenario for hunger games?

Oil is also a geopolitical negotiation tool. In April 2020, OPEC countries reduced substantiality daily oil production to stabilise prices.  The Biden admiration wants to “de-fossilize” the American energy sector, thereby dismantling the domestic oil and gas industry that flourished under Trump. In this context, The US will lose the upper hand in the oil market, and Russia could control the global oil supply. Will this redefine the geopolitical equilibrium?

Whoever controls oil controls much more than oil. >John McCain, American war veteran and politician>

Market overview

S&P 500, the leading US stock index had a fantastic week and recovered thoroughly after the nuisance of WallStreetBets turmoil. The stock market beats record after record and reached an all-time high.  Most indices ended the week into positive territory, but the trend is still fragile.

There are many factors to weigh into the equations: pandemic dynamic, vaccine distribution, lockdowns, inflation etc.

The cycle of free unlimited growth on the stock market amid a shrinking economy may reach to an end.

Gamestop:

Gameover

U.S. Securities and Exchange Commission investigators are allegedly scrutinising social media looking for signs of fraud in the matter concerning stock bubbles for Gameover, AMC and other listed firms.

The main narrative was that leading hedge funds had massive naked short positions on several shares. A herd of retail investors animated by a few Reddit forums decided to have a go on Wall Street tycoons. They bought the shorted stocks massively and inflated their prices in a short period of time. Robinhood, the platform that served as an intermediary for the abhorrent trades, stopped partially the purchase of those shares in an attempt to “regulate” the flow.

The Gamestop bubble burst, and the share’s price went into disarray, leaving many investors with big dreams and empty pockets. Moreover, the US market watchdog decides to investigate the matter and go through Reddit’s forum to look for market manipulation signs. Retail investors may end liable for the chaos generated, while hedge funds will get their monies from those transactions.

One should remember a rule of thumb: The house always makes money!

Commodities:

Hunger games?

CBOT wheat futures reached the highest level since 2015 and gained over 50% since the inception of the global sanitary crisis. The extended drought in several agricultural areas juxtaposed over Russia’s decision to curtail grains’ exportation inflated the leading soft commodity price.

The Food and Agriculture Organization's (FAO) food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaged 113.3 points in January versus 108.6 in December 2020. The FAO index reached its highest point since 2014.

The market of agricultural commodities is highly financialised, with many leading financial institutions interested in the global commodities trade. Those very financial institutions sitting on free billions from quantitative easing may take additional positions on soft commodities, thereby bolstering their prices.

Under this scenario, one should expect severe inflation over the next years.

Cryptocurrencies:

Bitcoin is recovering

Should Bitcoin go towards 100k USD? Or maybe towards 300k USD?  The answer varies depending on the perspective of each and every one. If a retail investor has 10 BTC, he or she would like to see the price going towards 100k USD, thereby entering the select circle of millionaires.

Besides pricing, most analysts forgot that 12 months ago before the May halving, the crypto-community feared mining viability, with Bitcoin prices below 6000 USD.  Indeed, in April 2020, the leading coin was eight times cheaper than its current value. The 2020 Bitcoin bubble was on the brink of an explosion in the early days of 2021. But as we often said, 2020 is not 2017 and Bitcoin recovered over the past week, reaching almost 40k USD. The climax value is less critical. The primary learning is that Bitcoin’s price has underneath an infrastructure that allows a robust price adjustment.

Market outlook

As predicted, Bitcoin recovered well and finished the week above 39,000. In the following days, some technical correction may take place amid technical sales. But in the long-run, there are good reasons to believe that Bitcoin will continue in positive territory.

The equity market regained its momentum built at the beginning of the year, but there are significant fears about a bearish trend.  The Gold ounce is currently oversold, and the current unrest in the leading stock markets could bring a positive direction in the next quarter.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.