OIL in 2021: how to trade it?

Information is not investment advice

Technical history

As 2019 opened, WTI oil was at $50 per barrel. Through that entire year, it was oscillating between this support and the resistance of $65. That’s exactly where it was when the virus stroke and the global oil demand plunged. WTI oil price did the same: it dropped from $65 to zero. $35 is the level which marked a definite start of recovery as it eventually proved to be tactical resistance. Closer to the year-end of 2020, the price moved into the channel $45-50 – that same channel that used to support the WTI oil price since March 2017. What’s the projection for 2021 then, will it repeat 2017-2019 and manage to get to $65?

Fundamental future

Iran

As the new Joe Biden takes over from Donald Trump as the newly elected US President, some changes in American international affairs are expected. Joe Biden is believed to try to get back Iran to the nuclear deal. If that’s the case, Iran will likely see the sanctions over it lifted. If that happens, Iranian oil will get back to the market – and Iran already announced that it’s planning to double its oil production in 2021. If the chain of events completes the sequence to let Iran have back its access to the global market, that will press on the oil price downwards and cause some trouble to OPEC.

OPEC

The oil cartel is experiencing increasing internal incoherence. The recent meetings it held were as controversial as ever and exposed existing disagreements between the member countries. That means the strategic goal of OPEC to put ground to the oil price may be an increasingly hard target to reach. That’s going to be a key point of struggle as $45 is notable below the minimum acceptable price range for most cartel member countries - the breakeven level for many of them is above $50. Therefore, whatever their disagreements are, they will likely ensure the supply cuts to keep the price above those levels. But how much above – that’s the big question.

The big question

Officially, Saudi Arabia expects the oil price to be between $45 and $50 through 2021 on average. That’s the range it factored into Aramco’s – and, hence, state’s – revenues (although that’s no longer going to be shared with the public – KSA doesn’t like sharing Aramco’s dividend plans). EIA and IEA say roughly the same and give moderate projections on the global oil demand while the oil glut is expected to clear by the end of 2021.

How to trade oil in 2021

So here you go with practical advice based on the above observations.

Go mid-term. Don’t take really long strategic positions on oil as it is most likely going to trade sideways across the channel around $50. It will be likely fluctuating in this area, and probably only the second part of the year 2021 may see a more upbeat performance.
Note down the bounce points to build clear support and resistance ranges. As the price is expected to be rather flat in the first part of 2021, it will like oscillated between key levels – your objective is to identify them: the more short-term you trade, the more precise you’ll have to be with them. As of the day when this article is written, we expect $50-55 to be the upside range and $35-40 to be the downside for the WTI oil price performance. Therefore, when you see price move into one of these channels, expect a reversal accordingly.
Remember that the first quarter of a year is always relatively downbeat for the oil market. Therefore, wherever it is by January 1, the oil price will likely go flat or downwards in the following weeks. Expect a tactical downward trajectory through March if you go with position trading.
OPEC will be holding monthly meetings to decide on the supply plans for each coming month. Therefore, be careful with planning for longer than every month’s meeting. Better – close your positions before OPEC+ starts having another series of discussions as oil may fluctuate during those sessions and change its local trend after them.
And finally, just follow the news. You need to know what the US oil stockpiles are, what OPEC said last, what’s happening with Iran, what’s Russia’s standpoint on oil, etc. All these factors are important and have their impact – especially if you trade short-term, on the day when they are announced.

FBS Analyst Team

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