Despite Weak Demand, Oil Futures Have Already Recovered

According to market data and analysts, oil futures trading is now as strong as in the early months of the COVID-19 crisis, with oil bulls and bears racing to protect against jolts in the steady rise of prices. 

Although actual fuel demand remains weak, oil futures have already recovered to pre-pandemic levels, with Brent crude futures spiking US$55 in less than a year to US$70 a barrel this week. 

However, market bets and historic trade rates are being influenced by uncertainty about when and whether people would start travelling and commuting as they once did.

Reuters reported that Marc Rowell, a senior energy broker at Britannia Global Markets, said the current situation is compounded by the length of uncertainty surrounding the resolution’s outcome. 

According to the US Commodity Futures Trading Commission, overall monthly contracts for US WTI crude kept by producers and merchants increased to more than 1 million in February for the first time since May. 

Meanwhile, on Feb. 19, market open interest in ICE’s Brent futures contract surpassed its previous high of 2.8 million contracts set in April of last year. 

Open interest refers to a trader’s long or short position in the market, and it represents their hopes for future value. 

Futures traders in the oil market use short positions to shield themselves from price declines, whereas consumers use long positions to insure against price rises. 

According to the US Energy Information Administration (EIA), the recent increase in oil prices allowed both producers and customers to enter the market with competing bets. 

Ont the other hand, according to the EIA, existing crude oil prices provide an opportunity for producers to obtain a contract rate based on current highs. Furthermore, the prospect of sustained crude oil price rises allows physical market buyers to lock in a contract rate at current levels if prices rise higher.

A disconnect between the four-month increase in futures prices and sluggish physical crude sales underscores the unpredictability, with global demand projected to catch up to supply only later in 2021. 

Speculative non-physical trading in the futures market, according to Rowell, is a significant contributor to the ongoing uncertainty. He also believes that uncertainty will continue to exist until there is a shift in momentum and price stability in line with the physical market.