Crude oil traders had a busy week last week as headlines from the OPEC+ meeting created volatility on the market. The cartel agreed to adjust production starting with January 2021 by 500k barrels per day (bpd) from 7.7 million bpd to 7.2 million bpd.
The announcement alone was enough to generate volatility in the oil markets. Brent oil, for instance, jumped to almost $50/barrel, and the curve looks in backwardation all the way through 2023. Last Friday, Brent managed to close at $49.25, the highest level since early March.
Oil Prices, Inflation, and COVID-19
The oil market is one of the most important markets to consider when trading or investing. A change in the price of oil has a strong impact on inflation and inflation expectations, with direct repercussions in central banks monetary decisions.
For instance, the April drop in the WTI price negative levels sent a deflationary shock across the globe. OPEC needed some time to react to cut production as you cannot just cut it overnight. As such, inflation fell close to zero and below in some cases, prompting central banks to ease monetary conditions.
The pandemic disrupted economic activity on a global scale. Lower demand for oil translated into lower prices and the abrupt fall seen in April coincided with the stock market rout.
As the world prepares for vaccines being rolled out, oil demand will pick up as the economic activity picks up as well. It will be interesting to see how the OPEC will manage to adjust the production level in such a way to reflect the economic recovery.
Monitoring the demand across the globe is key to evaluating where the price of oil might go next. For instance, last week, the global crude oil floating inventories dropped below one hundred million barrels for the first time since April. It tells us that the economic recovery is on track as mobility is on the rise too.
Whenever trading oil, consider that this is a commodity. On most FX brokers, trading oil is possible via CFDs (Contracts for Difference) that mirror the move in the price of oil. However, that is just one way to trade on a volatile product. Professional traders use the derivative market to speculate on the price of oil. When the price of WTI oil settled to -$40 in April, it was because there were no buyers for the May futures contract. Therefore, traders must monitor developments on the futures market besides the classic supply and demand levels.