Oil Indicators Shrug Off Viral Gloom on Covid Vaccine Hopes

(Bloomberg) -- Look across the oil market and almost every indicator is rallying.

While headline crude prices notched double-digit percentage gains at Monday’s highs, there was a broader-based surge in everything from jet fuel premiums, down to more arcane measures that traders use to gauge the health of the oil market.

Here are a few indicators that market watchers have been keeping a close eye on as headline prices spiked on Monday.

Spreads the Love

Some of the most notable movements in the market came in the shape of the futures curve, which moved sharply higher on the news of a potential vaccine. Brent for December 2021 gained the most relative to the next December since May, jumping by nearly 46 cents. On a normal trading day, such differentials only move by a handful of cents.

This is a clear sign of a more bullish interpretation among traders of the market’s future prospects.

Shorter-term timespreads rallied strongly too, indicating that traders have also re-evaluated the market’s more-immediate prospects.

Bearishly Positioned

Coming into the week, money managers and other traders had amassed huge short positions in crude.

The combined net short of speculators and other investors in the global Brent crude benchmark was at its biggest on record last week, setting the stage for a sharp short covering rally if bullish catalysts emerged.

“The length in the market is at an absolute low,” Marco Dunand, CEO and co-founder of Mercuria Energy Group Ltd. said at the Reuters Commodities Trading Summit virtual conference.

Between the Cracks

Crude’s gains were even outpaced by those for fuels like gasoline and diesel. In practice, a vaccine won’t immediately affect end-user demand for petroleum products, but firming in the combined refining margin for gasoline and diesel signals an expectation that transport use could start to return to normal once a vaccine is rolled out. “Flying and driving activity needs to improve substantially, and a key indicator for that is refining margins,” said Michael Tran, commodity strategist at RBC Capital Markets.

Flying Back

The real test for the oil market, though, is jet fuel. With a collapse in global aviation, the premium for the product -- it trades relative to diesel -- had been crushed.

But on Monday, even the oil market’s most beleaguered price was caught up in the rally. In northwest Europe, jet fuel was trading at its biggest premium to diesel since March at over $11 a ton. That came as a vaccine offered more optimism that a return to flying might start to be rolled out.

A Different Option

Trading volume in West Texas Intermediate options rose to the highest since April. Bets on the WTI curve flipping to backwardation -- when nearer-dated contracts trade at a premium to later-dated ones -- indicate underlying expectations for improving demand.

©2020 Bloomberg L.P.