Crude oil prices find support in the expected rise in US fiscal spending
- On Monday, WTI and Brent futures were up by 1.13% and 1.25% respectively.
- Goldman Sachs increased its estimates for US fiscal spending to $1.1 trillion, which is bullish for oil prices
- Rising coronavirus cases, and the resultant lockdowns, have triggered concerns over crude oil demand.
Crude oil prices are trading on a high. On Monday, the WTI futures were up by 1.13% to trade at $52.65. In comparison, Brent futures rose by 1.25% to $55.76. The price action is a reaction to the expected delay by the US government in lifting Iran sanctions. Besides, the expected rise in fiscal spending is likely to increase US crude oil demand by about 200,000 bpd. However, the rising COVID-19 cases in China and other parts of the world have triggered concerns over the demand for oil.
Increased fiscal spending to boost crude oil demand
On 14th January, President Biden announced a $1.9 trillion stimulus package. The funds are meant to help in alleviating the economic crisis caused by the ongoing coronavirus pandemic.
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While the proposed bill is facing resistance from the Republicans, Goldman Sachs has increased its forecast for supplementary fiscal spending from $750 billion to $1.1 trillion. According to the bank, a stimulus package of $2 trillion in the 2021/2022 period will increase US crude oil demand by about 200,000 bpd. The amount could also result in a weaker dollar, which is good news for the bulls looking to trade oil.
Furthermore, crude oil prices are finding support from the observable delay by the US to lift Iran sanctions. On this matter, Goldman Sachs noted, “The new administration’s focus on reaching bi-partisan policy support suggest a lessened incentive to quickly revisit the divisive Iran nuclear deal.”
In the short-term, the delay is set to tighten supply and boost crude oil prices. Saudi Arabia’s decision to cut production by 1 million bpd has also contributed to reduced supply. However, Amir Hossein Zamaninia, Iran’s Deputy Oil Minister, has stated that the country is increasing its output. Subsequently, it is likely to reach its pre-sanctions levels by March 2021.
Rising coronavirus cases heighten fears on crude oil demand
Crude oil prices are finding resistance from the increasing coronavirus-related cases and lockdowns. China, which is the largest consumer of crude oil, is one of the major economies with a rising number of COVID-19 cases.
The Middle Kingdom is experiencing the most intense wave of the disease since March 2020. The country’s National Health Commission indicated that new cases in the mainland were 124 on 24th January. The number represented an increase of 44 individuals within a span of 24 hours.
As the country prepares for the Lunar New Year next month, the government has enacted stringent control measures. Millions of people have been subjected to home quarantine, in addition to the enforced travel curbs.
In Hong Kong, the government has lifted the two-day lockdown enacted in the Kowloon area over the weekend. However, Sophia Chan, its Food and Health Secretary has stated that they would implement similar measures in the future if deemed necessary. Furthermore, France is likely to go into its third lockdown as the US surpasses 25 million recorded cases.
Notably, the rising COVID-19 infections across the globe, and particular in the major economies, has heightened concerns over the demand for crude oil. The status quo has boosted the negative sentiment triggered by EIA’s bearish inventories data. On Friday, the agency indicated that US crude oil stockpiles rose by 4.351 million barrels. The reading missed experts’ estimate of -1.167 million barrels.
Similarly, API’s release showed a build-up in US crude oil inventories. According to the agency, the amount in storage rose by 2.562 million barrels compared to the previous week’s -5.821 million barrels. During the same period, the IEA lowered its estimates for global oil demand in 2021 by 0.3 million barrels.