For seven consecutive days, crude oil and crude ETF prices came roaring back by as much as 5.3% on Monday, bolstered by a weaker dollar, bargain hunting, and the full approval of the Pfizer vaccine, which helped to counteract demand concerns generated by fresh cases of the Delta coronavirus variant.
Brent crude climbed $2.59, or 3.9%, to $67.75 a barrel after touching its lowest level since May 21 at $64.60.
Meanwhile, U.S. benchmark West Texas Intermediate (WTI) crude jumped $3.50, or roughly 5.5%, to $66.00 a barrel.
The news was helpful for crude ETFs like the United States Oil Fund (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO).
USO has gained 5.64% as of just after 1 PM EST Monday, while UCO has scrambled an impressive 11% higher during the session.
Both benchmarks recorded their biggest week of losses in over nine months last week, with Brent declining about 8% and WTI almost 9%.
Many nations are responding to the climbing coronavirus infection rates by establishing fresh travel restrictions.
“We expect to see more adjustments this week, but the market sentiment will likely remain bearish, with growing concerns over slower fuel demand worldwide,” said Kazuhiko Saito, chief analyst at Fujitomi Securities.
China, the world’s biggest oil importer, has placed new restrictions that are altering shipping and global supply chains. The United States and China have also ordered restrictions on flight capacity.
In addition, as demand falters due to the increase in pandemic restrictions, supply is climbing. U.S. production climbed and drilling companies increased their rig count for the third consecutive week, according to services company Baker Hughes.
But several factors could be offsetting the demand picture, helping to drive up the price of oil Monday, shaking up the recent downtrend that’s been in place.
One factor for oil’s improving performance is that a drop in the U.S. dollar provided some support for oil and crude ETFs, as a lower dollar makes crude less expensive for holders of other currencies.
“A softer dollar prompted investors to rewind their positions,” said Chiyoki Chen, chief analyst at Sunward Trading.
The dollar index, which measures the currency against six peers, traded at 93.349, paring gains after hitting its highest level in over nine months on Friday at 93.734.
Investors were also adjusting their positions before the U.S. Federal Reserve’s annual Jackson Hole symposium in Wyoming on Friday.
“While the virus remains a threat to the short-term demand outlook, despite signs of an improving situation in China, this week’s Jackson Hole summit may give the market some ideas about the timing of tapering,” said Ole Hansen, Saxo Bank’s head of commodity strategy, referring to an expected reduction in monetary stimulus for the economy.
According to some experts, bargain hunting in beaten-down asset sectors could be playing a role in crude’s bounce on Monday.
“Risk assets appear to have caught a strong bid this morning after last week’s hammering and that’s lifting crude, too,” said Vandana Hari of Vanda Insights.
“Sentiment in the financial markets is tentatively turning upbeat on expectations that the US Fed may be willing to defer its tapering of asset purchases in view of the delta wave slowing economic growth,” Hari added.
Analysts at Goldman Sachs agreed, stating that, “oil’s selloff in the past month was overdone,” with the key investment bank maintaining its year-end projection of $80 a barrel.
In addition, oil could be aided by potentially big news for biotech and biotech ETFs, as the Food and Drug Administration on Monday fully approved the Pfizer and BioNTech coronavirus vaccine, making it the first coronavirus vaccine in the U.S. for non-emergency use. The move could generate additional confidence for more businesses, schools, and universities to embrace the current vaccine mandates. This could enable more travel and help drive the price of crude higher as well.
“When you look across the country, to a certain extent, this current wave is the pandemic of the unvaccinated,” Mississippi Gov. Tate Reeves said at a press conference. “We continue to see more and more data, and the data is becoming more and more clear. Those who received the vaccine are significantly less likely to contract the virus.”
Oil and gas companies are also considering the matter of vaccinations.
Chevron, which has around 47,000 employees, saw the latest round of infections derail plans for staff to return to work. The company will require offshore workers in the U.S. Gulf of Mexico, as well as some support staff onshore, to have vaccinations by November 1.
“Chevron is committed to protecting the health of our people, and vaccinations are the strongest safeguard against this virus,” a company spokesperson told the Journal.
Analysts at ANZ Research noted that ongoing vaccination drives in Europe and the U.S. have limited the scale of restrictions in both regions despite rising caseloads.
“This has seen demand remain robust as mobility continues to improve. Overall, this should keep the market tight,” the analysts said in a note.
The OPEC+ group is planning to have its own meeting Sept. 1 to review policy, with some market sources predicting the group to wait on opening up supply based on the recent resurgence in the Delta variant.
“OPEC+’s decision on its own tapering next week will likely be influenced by how strong and sustainable any crude price recovery looks this week. Given crude’s tailspin since the start of August, I would imagine Saudi Arabia would be poised to steer the alliance in the direction of trimming or even temporarily suspending the planned supply boost,” Vandana said.
“Prior to the recent sell-off, the market would have likely placed not much focus on this meeting, with production policy set until the end of the year,” said analysts at ING in a note. “However, with the recent weakness in prices, the market will now be eagerly waiting to see if the group decides to delay some of its easing in cuts.”
The King Abdullah Petroleum Studies and Research Center, an independent energy research institute, envisions the pitfalls of a supply surplus this winter, if the potential damage to oil demand continues.
“OPEC+ may be required to reintervene with modest temporary cuts if inventory builds faster than desired,” the institute said in a report released Monday.
For investors looking to get on board a perceived pullback in crude, some ETFs to consider are the United States 12 Month Oil Fund (USL) and the iPath Pure Beta Crude Oil ETN (OIL).
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