Oil Surges With Weaker Dollar Compounding U.S. Supply Draw

(Bloomberg) -- Oil closed at an eight-month high amid a weakening dollar and optimism surrounding a surprise decline in U.S. crude supplies and recent breakthroughs on a Covid-19 vaccine.

Futures in New York advanced 1.8% on Wednesday after rallying the three previous sessions. An Energy Information Administration report showed U.S. crude stockpiles fell 754,000 barrels last week. At the same time, positive developments on a vaccine have spurred a swift reshaping of oil’s futures curve, with several key markers moving into a bullish backwardation structure in recent days.

In addition, Chinese and Indian refiners issued a flurry of tenders seeking crude oil for loading in January, highlighting the strong demand coming from parts of Asia. Meanwhile, the Bloomberg Dollar Spot Index fell as much as 0.2%, boosting the appeal for commodities priced in the currency.

“It has been a really good run. We haven’t seen a run like this since the spring after we went to negative prices,” said Peter McNally, global head for industrials, materials and energy at Third Bridge. “Sentiment certainly has changed pretty quickly. At any point, it all could take a breather, but lately it feels like supply and demand fundamentals are heading in the right direction.”

While optimism over vaccines has helped lift the U.S. crude benchmark more than 25% so far this month, the swift rally poses yet another headache for OPEC+ ahead of next week’s meeting to evaluate the group’s output strategy. In the latest sign of growing rifts within the cartel, Iraq’s deputy leader said that OPEC should take members’ economic and political conditions into account when deciding production quotas rather than adopting a “one-size-fits-all” approach.

Iraq Voices Frustration With OPEC Days Before Crunch Meeting

West Texas Intermediate prices for 2021 were at their strongest level since March on Wednesday, while those for 2022 were at their highest since September. The higher forward prices are boosting the incentive for oil producers to lock in their supplies for the coming years. Prices have also been supported by renewed geopolitical tensions, with recent attacks on a fuel depot in the Saudi city of Jeddah and on an oil tanker in the Red Sea.

Aside from the headline crude draw, the EIA report showed a decline in inventories at the nation’s biggest storage hub in Cushing, Oklahoma and the 10th straight draw in distillate supplies. But there were some bearish data points: gasoline stockpiles rose over 2 million barrels and crude production ticked higher.

“There could still be additional petroleum product weakness and higher inventories, before a material rebound manifests,” Bart Melek, head of global commodity strategy at TD Securities, said in a note. “This combined with uncertainty on the OPEC+ production side, given these relative high price levels, suggests that crude has gone as high as it can for now.”

Meanwhile, the streak of draws in distillate inventories have led a recovery in the so-called diesel crack. The refining margin has been trading above $12 this week after plunging below $10 a barrel earlier this year. Still, the crack remains at the weakest seasonally since 2009.

©2020 Bloomberg L.P.