The yearly five-day rebalancing of the portfolios starting on January 8, 2021, may attract a staggering US$9 billion buying into crude oil contracts. If it happens that way, it will put increasing upward pressure on the oil prices, according to investment banks and analysts reports published by Bloomberg.
This rebalancing of indices to adjust the ideal weighting of assets in the portfolios happens annually to ensure that target allocations and risk levels are restored. Nevertheless, the rebalancing in 2021 may attract more than the normal buyers into the crude oil contracts due to the 20% decline of oil prices last year.
Based on estimates compiled by Citigroup, the coming five days may see a massive buying spree in the oil futures market that may see an inflow of up to US$9 billion to adjust the weighting of major commodity-integrated indices.
Notably, the market may encounter long positions into an extra 80-100 million barrels equivalent of oil futures contracts. If it happens, the oil price might increase by $2-$3 per barrel as explained by the chief executive at Black Gold Investors LLC, Gary Ross.
It is not a promise that the market will experience such levels of buying into oil futures since some investors and traders might have already invested before the rebalancing period. Although the buying spree is not quite high, the rebalancing might continue to underpin the oil prices.
Analysts at RBC Capital Markets, Helima Croft and Michael Tran, wrote in a note:
“This buying pressure across the complex should serve as a tailwind and help fortify the improving oil market sentiment.”
The upside pressure on oil is expected to build on the rally as the year starts after the OPEC+ decision to postpone another 500K bpd increase in production from February. Also, the surprise announcement from Saudi Arabia, which pledged to cut an extra one million bpd from its production in February and March may affect the prices. The WTI crude prices reached $50 a barrel on January 5 for the first time since February last year.
Saudi’s Unexpected Cut Underpins Oil Prices
Oil prices remained high and were showing signs of an uptrend on January 7 reaching an 11-month high; as the impact of Saudi Arabia’s surprise announcement about an extra one million barrels of crude production cuts enabled the markets to withstand civil unrest in the US and the resurging global pandemic.
At around 4:11 p.m. ESTon Thursday, the WTI benchmark was trading up by 0.61% on the day hovering around $50.94. the last time WTI surpassed $50 per barrel was February last year. Barely a week ago, the WTI benchmark recorded a price of $48.52.
On its part, the Brent crude benchmark gained and was trading at $54.50, up 0.37% on the day. February 2020 was the last time the Brent benchmark managed to sit above $54.
For now, it appears like the oil market is focusing majorly on what Saudi Arabia can do to rebalance oil’s supply and demand. The market is ignoring any political instability that is developing in the United States. Oil markets could also be ignoring the major impact that the new waves of lockdowns will have on the general demand outlook.
Although the oil prices plunged shortly on January 6 after a group affiliated with President Trump stormed into the Capitol, it failed to dampen the effects of Saudi Arabia’s gift that seems to give continuously. Currently, the market is satiated.
Nonetheless, the oil prices are far off the levels that they were in the summer of 2019, and Brent oil is trading $20 per barrel below where it was trading during the 2018 summer. The coronavirus pandemic has stripped millions of barrels per day from the demand side.
Not even Saudi Arabia can offset the demand destruction caused by the pandemic.