Business

Oil Gearing Up for a Comeback

As 2020 draws to a close, oil prices are providing quite the show in the financial markets. It was a rocky start for many traders this year and commodity trading, especially for instruments like oil, showed unprecedented volatility. In fact, uncertainty was the name of the game across most sectors of the markets in 2020, and oil has been no exception. Add to that the US election results, as well as the recent announcement from Pfizer and BioNTech on the effectiveness of their Coronavirus vaccine, and there’s no surprise that most of the markets have experienced their share of a rollercoaster ride. In this article, we’ll take a look at the highs, lows, and in-betweens of key instruments like oil in the financial markets this year, and what the future could hold for the commodity.

Initial nosedive

At the beginning of this chaotic year, countries all over the globe went into nationwide lockdowns and economic activity came to a grinding halt. This meant that the demand for oil took a nosedive as factories were unable to operate, exports were largely put on hold and travel was at an all-time low. OPEC+ quickly had to devise a plan for oil to deal with the surplus of the commodity and the drastic decline in demand—a plan which involved, for nations who supply oil, a cut to their outputs intended to even out demand and support oil prices. As a result, OPEC cut its oil output by 1.93 million barrels a day to 22.69 million a day and Saudi Arabia followed suit, cutting theirs by 1.13 million barrels a day to 7.53 million in June.1 Soon, the rest of the oil supplying nations fell in line as well, making OPEC’s plan largely effective.

Year-end escalation

The plan was indeed successful, and the oil industry managed to come out the other side of the first wave of the Coronavirus a little worse for wear, but still intact. According to U.S. Energy Information Administration (EIA) Administrator Linda Capuano, “EIA expects Brent prices will remain near October’s average of $40 per barrel for the rest of the year as high global oil inventories and surplus production capacity limit upward price pressure.”2 Capuano went on to say that in 2021, Brent crude oil prices are expected to rise to $47 per barrel.2 Many traders are looking to 2021 as the year for oil’s recovery in the markets and, after Brent oil surpassed the $45 mark in early November, those who participate in commodity trading may be interested to see what next year will bring.3 “The short-term is still quite challenged, demand is looking quite weak. The second half of 2021 is when we expect to see that demand recovery start to take hold,” said Karim Fawaz, who leads the energy advisory service at IHS Markit.3 In the short term, oil is facing another round of nationwide lockdowns across Europe and potentially other parts of the world as second waves of the virus hit, which may impact prices, similar to what happened earlier in the year.3

Vaccine hopes pump up oil prices

Thanks to Pfizer and BioNTech’s vaccine announcement, oil prices are currently on the rise.4 What’s the connection? The idea that a COVID-19 vaccine may be available soon has traders thinking that may be a signal that the global economy could be back on track, the result of which would increase the demand for energy used to operate factories and cars, sending the demand for oil up and affecting oil prices. 4 Pfizer has stated that they aim to have 50 million doses ready by the end of 2020, in order to begin distribution as soon as the vaccine is approved, which could bode well for the oil industry.4 On November 9th, soon after the announcement was made, West Texas Intermediate (WTI oil) crude oil prices increased by 9.6% and Brent crude prices gained 8.5% which, according to Reuters, are the largest leaps energy traders have seen in the markets in months.4 However, while the positive vaccine news has caused many stocks to soar, including oil, oil’s full reaction may be somewhat limited due to the fact that there may be a delay between the approval of the vaccine, and the implementation of the immunization program.3

Moving forward

The larger future of oil remains somewhat uncertain due to the fact that much of the world is shifting collectively towards sustainable energy sources. Highly influential decision makers like Joe Biden, the US President-elect, have expressed their plans to focus on green energy, which may pose a number of challenges for oil going forward.

At iFOREX, traders interested in taking advantage of the current and future volatility experienced by oil prices can participate in commodity trading in the form of CFDs or Contracts for Difference. CFDs allow traders to take advantage of price movements in both directions—up and down—of their chosen financial instruments, without the need to purchase the underlying asset.

At iFOREX, you can choose from over 900 CFD instruments including commodity trading like WTI oil, Brent oil, and many more, as well as shares, foreign currency, indices, and ETFs. Join now and take advantage of free educational materials, including a 1-on-1 training session with a live trading coach, as well as advanced trading tools, market signals, and access to the iFOREX economic calendar, which keeps you up to date on important financial events worldwide.