Oil Posts Weekly Gain With Stimulus Hopes Aiding Vaccine Rally

(Bloomberg) -- Oil rose for a seventh straight week as efforts to pass another U.S. virus relief package added to optimism that the vaccine’s rollout will provide a long-awaited boost to demand.

Futures rose 1.5% in New York on Friday, extending this week’s rally to over 5%. Talks on a relief package have made some headway, with Senate Majority Leader Mitch McConnell saying he’s “even more optimistic now” that an agreement is near. Recent progress in rolling out a Covid-19 vaccine has also buoyed the outlook for consumption.

“It’s all about the return to pre-pandemic life, and we’re getting there,” said Edward Moya, senior market analyst at Oanda Corp. “You have major breakthroughs on the vaccine front, which has been very positive for the demand recovery outlook. People are also playing close attention to the overall trajectory of the U.S. dollar.”

The Bloomberg Dollar Spot Index is set for a weekly decline and has been trading near its lowest since 2018. A weaker dollar raises the appeal for commodities priced in the currency.

Underlying the climb in headline crude prices, premiums on nearer-dated contracts relative to later ones are indicating improving demand. The bullish pattern known as backwardation has strengthened at the back end of oil’s forward curve. West Texas Intermediate’s nearest December contract trades more than a $1 a barrel higher than that for December 2022, compared to trading at a discount less than a month before.

Yet, there are signs the market’s rally is due for a pause. Brent’s nearest timespread ended the week at parity, compared with a premium of as much as 18 cents the week prior. At the same time, premiums for real-world barrels are easing.

“There’s great news about the arrival of vaccines, the promise they hold, and that global demand is likely to return in a big way as a result,” said Matt Marshall, director of market analytics at AEGIS. “But in the near term, that has zero effect on petroleum demand.”

The spreading virus and lockdowns are weighing on demand, but the hit is much smaller than earlier in the year and is likely only a speed bump to rebalancing the market, according to a Goldman Sachs note. This will leave the oil market range-bound and choppy in coming weeks as vaccine enthusiasm is followed by headlines on tighten pandemic restrictions, the bank said.

Meanwhile, as oil prices move higher, there are concerns this might lure producers to tap capacity that’s been sidelined during the pandemic. While the U.S. shale industry requires heavy reinvestment to boost output, the large amount of spare capacity could present a risk to further price gains.

“As has been the case for several years, a swing factor on whether oil can retain rallies or violently give them back is U.S. supply growth,” Macquarie Group analysts including Vikas Dwivedi said in a note dated Dec. 17. “This spare capacity again introduces surprise supply risk that could limit the magnitude and duration of rallies, especially if the WTI forward curve exceeds $50 per barrel.”

Drilling rigs targeting crude oil in the U.S. rose for the fourth straight week and to the highest level since May 8.

©2020 Bloomberg L.P.