Oil Emerges from Covid Abyss With Startling Year-End Turnaround
A valve control wheel connected to crude oil pipework in an oilfield near Dyurtyuli, in the Republic of Bashkortostan, Russia. (Photographer: Andrey Rudakov/Bloomberg)

Oil Emerges from Covid Abyss With Startling Year-End Turnaround

Oil in London climbed above $50 a barrel for the first time since the pandemic ground the global economy to a halt in a remarkable rally that few predicted would happen this soon.

Global benchmark futures surged 2.8% Thursday, reaching a nine-month high. The rebound represents a startling turnaround for a market that was brought to its knees earlier this year by an unprecedented loss of demand. With places to store unused oil running out, OPEC and its partners collaborated to stanch outflows and stabilize markets while the world awaited a vaccine.

Announcements last month from Pfizer Inc. and others that safe vaccines could be rolled out by spring boosted the outlook for global consumption. Asia is continuing to lead the rebound in physical demand amid robust purchasing by China’s private refiners. The U.S. dollar also weakened, which raised the appeal for commodities priced in the currency and helped thrust Brent past $50.

“I am a bit surprised that it happened now,” said Bart Melek, the head of global commodity strategy at TD Securities. “I have been advocating $50+ Brent, but I thought that would happen after we see inventories and demand look better.”

It’s possible the market is getting ahead of itself though, with key technical indicators signaling benchmarks are overbought and U.S. inventories recently piling higher.

Oil Emerges from Covid Abyss With Startling Year-End Turnaround

U.S. inventories expanded a whopping 15.2 million barrels last week in the biggest build in government data going back to 1982, with the exception of one week in April. At the same time, domestic gasoline demand is the lowest it has been for this time of year since 1997, Energy Information Administration data show. And it will be months before the vaccine is distributed widely enough to fully reopen the economy.

Still, supply and demand dynamics have drastically improved from just a few months ago. Inventories are drawing down globally, and there are signs the market is handling increased output better than initially anticipated.

“The distinct FOMO-type shift in financial market sentiment is supported by a global physical market that is absorbing barrels at a more robust-than-consensus pace,” RBC analysts including Helima Croft and Michael Tran said in a report. “Asia refinery runs remain firm, global floating storage levels are being dismantled at a vigorous pace and European mobility is accelerating amid loosening regional lockdowns.”

Prices
  • West Texas Intermediate for January delivery rose $1.26 to settle at $46.78 a barrel
  • Brent for February settlement increased $1.39 to end the session at $50.25 a barrel
  • Both of the benchmarks are at the highest level since early March

In addition to the recent surge in the price for near-term contracts, the swift reshaping along oil’s forward curve underscores the confidence in a long-term recovery. The curve is now trading in a structure known as backwardation that makes it profitable to roll contracts from one month to the next, which is also attracting a rush of new flows to the market.

Meanwhile, there are glimmers of a recovery in Europe in addition to Asia’s full-throttle return. The U.K., which emerged from a second lockdown this month, saw road fuel sales jump by almost 10% last week. Fuel use in Brazil has surpassed pre-virus levels. Still, it’s a less certain picture in the U.S., where gasoline consumption has dropped to the lowest since May.

Other oil-market news
  • Saudi Arabia is looking to emulate neighboring Abu Dhabi by using its state energy firm to raise billions of dollars from investors, as the kingdom seeks cash to counter a severe recession.
  • Vitol Inc. was suspended from doing business with Mexico’s state oil company after the world’s biggest independent oil trader paid just over $160 million to settle charges that it conspired to pay bribes in Latin America.
  • Texas’s main oil regulator has been prohibited from waiving environmental rules and fees, a measure adopted to help drillers cope with the pandemic-driven slump in crude prices.
  • Israel and the United Arab Emirates held talks to discuss cooperation in the oil and gas sector, months after the two nations agreed to normalize ties.

©2020 Bloomberg L.P.

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