The WTI crude oil price started the year in a spectacular mode – it reached $63 in a strong, bullish trend since last November. Coincidence or not, November 2020 is the month when major pharmaceutical companies announced the preliminary results for their COVID-19 candidates.
In the meantime, vaccination efforts in advanced and developing economies show that real-life results confirm the expectations. As such, a buoyant oil market prepares for the economic recovery to follow.
The move higher in the price of oil is so abrupt that it took both traders and policymakers by surprise. On the one hand, currency traders betting on a decline of the Canadian dollar (CAD) had a tough time in 2021. In fact, all commodity currencies outperformed on the back of faster economic recovery ahead.
On the other hand, policymakers already see inflation close to their target. In Europe, the core inflation for the month of January 2021 grew at the fastest pace on record. Oil triggers higher prices, and the question now is how much will the WTI crude oil price rise?
Effective Vaccines, Texas Freeze, Send Crude Oil Price Higher
At the end of the last year, major investment houses were optimistic about the economic recovery. If vaccination efforts were successful, the second half of the year should bring tremendous growth. As such, most forecasts focused on the crude oil price to end the year between $55-$65, depending on the house.
It currently trades above $63 less than two months into the trading year, telling us how huge the discrepancy is between what was expected and what happened. Naturally, higher revisions are expected. We already have one – Morgan Stanley came out bullish, anticipating the price of Brent crude oil at $70 by the third quarter of the year. More bullish revisions are expected as we get closer to the end of the pandemic.
The options market went one step further. Options are derivatives that offer exposure to the underlying asset, but they represent a right, not an obligation, to trade the asset. The owner of a call option expects the price of the underlying asset will rise in the future, while the owner of a put option bets in the opposite direction.
According to Saxo Group, a European investment house, the interest on $100/barrel call options keeps rising. The interest on the three main forward contracts, with expiration in December 2021, 2022, and 2023, rose near 80,000 lots. Therefore, not only that $100/barrel is possible, but investors actually bet on it.