Oil Rises With U.S. Supply Dropping and OPEC Inching Toward Deal
(Bloomberg) -- Oil jumped the most in a week after a surprise decline in U.S. crude inventories and signals that OPEC+ made progress toward a widely anticipated deal on extending output curbs.
Futures rose 1.6% in New York following a government report that showed domestic crude stockpiles fell by 679,000 barrels last week. U.S. oil exports topped 3 million barrels a day for the first time in five weeks, though gasoline and distillate storage increased.
Prices also found support as signs emerged that the Organization of Petroleum Exporting Countries and its allies are making progress toward an agreement on output cuts. Still, it’s too early to say whether that will translate into a final deal, according to delegates, as the producer group works through a dispute centered around Saudi Arabia and the United Arab Emirates. Bipartisan progress toward another round of U.S. fiscal aid could also offer a boost to demand.
“The draw was unexpected, and was really a function of a pretty significant rise in U.S. crude exports,” said Rob Thummel, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. “Builds in gasoline and diesel are clearly indications of Covid restrictions coming back into mobility data and causing short-term concerns about demand.”
Oil has rallied along the futures curve as marked improvements in Asian demand and strength in the North Sea market help drive gains at the front-end, while longer-term contracts show growing confidence that a vaccine will trigger a rebound in demand. Much of that momentum could be sapped, however, if OPEC+ returns more oil than the market can absorb at a time when governments are tightening restrictions to rein in surging virus cases.
For the first time since February, before the pandemic roiled financial markets, the spread between Brent’s next two December contracts settled in a bullish backwardation structure, where traders pay a premium for closer deliveries in a sign of an improving supply and demand balance next year. The same is happening with the so-called prompt spread between the nearest contracts, and the WTI curve is also strengthening along those lines.
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“At least in the short- to medium-term it’s all been about OPEC,” said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. “Demand is going to be hit for at least the next few months. If OPEC does not get an extension on the cuts and compliance of these cuts, oil could head a lot lower.”
The U.S. Energy Information Administration report also showed crude-processing rates at refineries declined and are still below 80% of capacity amid a pandemic-induced slump in demand. The combined refining margin for gasoline and diesel is below $9 a barrel, its lowest since 2009.
Plus, the oil market could be underestimating the bearish implications of the delay in the OPEC+ talks, consultant FGE wrote in a report. If there’s no agreement, stockpiles would rise early next year and lead to a very bearish market, FGE said. That comes as output from the group rose last month by 530,000 barrels a day, according to a Bloomberg survey, with Libya pumping at the highest level in a year as its internal conflict abates.
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