Until recently, the story of oil has been nothing but production cuts and halts in an effort to support prices during the pandemic.
Then the Texas cold snap happened, which further limited the supply of oil for a couple of weeks…
Followed by the whole Suez Canal crisis.
But now that those are out of the way and the production cuts are soon coming to an end…
Will there be too MUCH oil?
Well, the big concern here for market bulls is whether the economy will improve sufficiently and fast enough to generate enough oil demand to match the increasing supply.
Should the economy slow down without an accompanying oil slowdown, well, supply will outpace demand and drop prices.
Of course, these traders are betting on two interrelated races here: oil demand vs. supply and COVID-19 vaccination rate vs. the spread of the original strain of COVID and the new variants.
If COVID outpaces the vaccine, economies could shut down again, leading to lower demand relative to the increasing supply — thus, a significant price drop.
One point in favor of oil prices — or at least something that could slow the selling pressure — was brought up in a statement from the International Monetary Fund.
Last week, The IMF said that unprecedented spending in the fight against COVID-19 could push global economic growth as high as 6%.
We haven’t seen a number like that since the ’70s.
If this were true, and governments began pouring more money into the COVID-19 fight, people would naturally get more bullish… only this statement from the IMF didn’t do much.
As mentioned, selling may have slowed a bit, but traders still seem to be concerned primarily with the supply increases.
Reports from the US Energy Information Administration (EIA) bring mixed results, too.
On the one hand, US crude inventories dropped by 3.1 million barrels during the week ending April 2, compared with analyst expectations of a mere 1.4 million barrels.
At the same time, however, US gasoline stocks increased by around 4 million barrels that same week. Compare that to the predictions of a 221,000-barrel drop.
Geopolitical events could lead to even more supply increases — primarily, the Iran situation.
Some people expect sanctions on Iran to be lifted soon, leading to Iranian oil adding to the total global oil supply.
Overall, last week’s price action definitely indicated that buyers aren’t likely to cause any meaningful rally to occur.
Instead, in my opinion, traders are going to stay in “sell the rally” mode.
I think that they won’t believe that prices could continue upward much longer, given the big supply concerns.
So there may be “too much oil” in the market soon…
But when it comes down to it, that also depends on how quickly governments finally put down COVID-19 for good.
Still, I’ve got my eye on a few ways to profit off this news in the near-term and several months out.