Daily updates on foreign exchange news

Oil Bulls Win Big in January, After Ukraine, OPEC Theater

Anticipatory anxiety seems to hit oil markets in a big way and the big winners are bulls who coasted to their largest monthly gain in almost a year in January, riding on the fear that something bad will happen soon to Ukraine and global oil supplies.

London-traded Brent, the global benchmark for oil, finished January up more than 14% while West Texas Intermediate, the benchmark for U.S. crude, gained more than 17% for the month. Those were the biggest monthly advances for oil since February.

Brent made highs above $90 per barrel last week for the first time since October 2014 before settling at $91.21, up $1.18, or 1.3% on Monday. 

WTI also hit a seven-year peak of $88.83 Friday, before its latest settlement at $88.15.

Oil markets rallied without stop the past six weeks fueled by geopolitical concerns over the Russia-Ukraine conflict, and the upcoming meeting of oil producers alliance OPEC+ — which never fails to provide its own drama to keep crude prices on the boil.

“Oil prices are on edge, moving higher even as Russia has not invaded Ukraine yet and reports that OPEC oil production fails to hit agreed-upon targets,” Phil Flynn, senior energy analyst at Chicago’s Price Futures Group and an avowed oil bull, wrote in a commentary Monday.

And that really has been the story in oil since mid-December.

As the United States and Russia accused each other at the United Nations on Monday of stoking the Ukraine Crisis, crude traders focused on the upcoming Feb. 2 meeting of the OPEC+. 

Since the end of 2020, OPEC+ has used every one of its meetings as an opportunity to ramp up oil prices with talk of either production cuts or inability to meet demand. In recent weeks, the energy media has been saturated with reports that oil exporters in the alliance were unable to add to production due to capacity constraints from under-invested oil fields.

At its Wednesday meeting, OPEC+ is likely to stick with a planned rise in its oil output target for March, several OPEC+ sources told Reuters. 

But the higher production target wouldn’t matter when there is a perception that the alliance simply cannot pump more.

The 26-nation OPEC+ is led by Saudi Arabia — which runs the original 13-member Organization of the Petroleum Exporting Countries — and Russia, which steers a group of another 10 non-OPEC countries that includes itself. 

OPEC+ knowingly added to the anticipatory anxiety in oil by calling an undersupplied market “balanced”, said John Kilduff, founding partner at New York energy hedge fund Again Capital.

Since mid-2021, OPEC+ batted away calls by the United States, China and India to add more barrels to the market as those economies were experiencing dynamic recovery from the coronavirus pandemic. The alliance’s excuse: Oil markets were already “balanced”.

“OPEC+ called the oil market balanced but ensured it never reached balance, because true balance could mean $60 oil, not $90,” said Kilduff.  

Some analysts actually anticipate a severe shortage of petroleum this year. Reuters columnist John Kemp is one, noting that inventories were already low and there was little global spare capacity to raise production in the short term.

ANZ Research also says its research shows a market in deficit, with low inventories. It added that "supply constraints will likely induce a sizable risk premium" as air travel picks up, particularly in Europe.

Reference by: