Brent crude falls below $80 as bears take control
Stopping at the fuel pump has become a significant concern for people across the globe as prices of oil and gasoline skyrocketed in 2021. Brent crude reached a high of $86.70 in late October but failed to break above 2018 highs of $86.74, while US crude passed $85 for the first time since 2014. Some investment banks even warned that oil could surpass $100 in the upcoming months as demand continues to outweigh supply.
OPEC+ slow response to meet surging demand in 2021 has been attributed to the biggest factor in rising oil prices. The 400,000 additional barrels per month were falling short of meeting growing demand, especially that African producers like Nigeria and Angola could not meet their quotas due to investments and maintenance problems.
US shale producers could not come to the rescue fast enough compared to previous cycles as investors continue to demand capital discipline for these firms. Hence, rig counts are returning slower than expected.
On Wednesday, data from the EIA showed crude oil inventories declined 2.1 million barrels in the week ended November 12 to 433 million barrels, and gasoline stocks also slipped 710,000 barrels to 212 million.
These fundamentals should have provided a further tailwind to prices, but since topping at $86.70 on October 25, Brent has declined by more than 8%. So, where are the headwinds coming from?
OPEC and the International Energy Agency expect the market to flip from deficit into surplus in the first quarter of next year. That encouraged some traders to reassess their long positions in energy markets. COVID-19 risks are being closely monitored as cases in Asia and Europe continue to increase as we approach winter. Tightening restrictions is on the table for several countries to keep daily infection under control, putting a cap on prices.
However, yesterday's sharp declines were driven by expectations of a possible coordinated release in oil supplies from the world's largest economies led by the US. According to a Reuters report, the US asked Japan, India, China, and other countries to consider tapping their oil reserves to drag prices lower. Such an action would balance the energy markets earlier than expected as tens of millions of barrels will hit the market quickly. Hence, expect bearish sentiment to continue dominating in the upcoming few days, and only a big surprise could send prices above 2021 highs.