Reuters
- Oil rallied to its highest in eight months, as the likely imminent rollout of a COVID-19 vaccine ignited optimism over a pickup in demand next year.
- Brent crude futures market shows traders are finally betting on a sustained recovery in global fuel consumption.
- "Though global oil demand is still well below the 2019 level, the visible path for the coming oil demand rebound is now clear for everyone to see," SEB chief commodities strategist Bjarne Schieldrop said.
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The oil price rose for a third day on Tuesday, reaching its highest since March, as the imminent rollout of COVID-19 vaccines breathed life into the prospect of a significant pickup in demand from early next year.
Oil was one of the worst-affected asset classes by the onset of the pandemic, as most global road, air and maritime traffic ground to a halt and factories and businesses around the world shut down temporarily.
A set of announcements of promising COVID-19 vaccine candidates from US drugmakers Pfizer and Moderna, as well as UK rival AstraZeneca, this month have triggered a 10% rise in the price crude oil, whose value rests very heavily on the outlook for global consumption.
The price is still showing a decline of more than 30% so far this year, but the steady increase since the spring has cut this loss from closer to 90% during the depths of the crisis. At one point in April, crude oil traded at a discount of $40 a barrel, as traders in the US in particular scrambled to find enough storage for unwanted fuel and were forced to sell at any level.
The prospect of a vaccine won't do much for oil demand in the very immediate future. The International Energy Agency, which advises Western governments on energy policy, forecast earlier this month that even with successful vaccination underway it would take until at least the middle of 2021 to see a material, sustained improvement in consumption.
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However, the oil futures market paints a far more optimistic picture. The premium of Brent crude futures for delivery in six months' time over those for delivery in one month has evaporated to almost zero.
This difference between the benchmark Brent futures contract and that six months ahead reflects traders' expectations for the balance of demand versus supply. When the price gap is positive, as it was when it reached a high of almost $14 a barrel in March, it indicates an expectation that supply will overtake demand. When it turns negative, it reflects an expectation that the balance between supply and demand will tighten, leaving the oil market in a deficit, which boosts prices.
"An oil demand rebound in 2021 is now a certainty and markets are not waiting to price it in," SEB chief commodities strategist Bjarne Schieldrop said.
"Though global oil demand is still well below the 2019 level, the visible path for the coming oil demand rebound is now clear for everyone to see and financial markets are pricing it in and that is why the oil price has moved up to the highest level since the mid-March oil price collapse," he said.
InterContinentalExchange/Bloomberg
Brent crude futures were trading around $46.40 a barrel, up 0.7% on the day, having touched a session high of $46.69, the highest since mid-March. WTI crude futures were up 0.9% around $43.44 a barrel.
There are other signs that show traders believe the fortunes of the oil market are starting to turn.
Kevin Solomon, an oil analyst at broker StoneX, said in a note on Monday that the amount of oil kept on supertankers — the most expensive form of storage that traders tend to resort to only when they have no way of selling it — continues to fall, thanks in large part to demand from Chinese refineries.
The OPEC+ group, made up of the Organization of the Petroleum Exporting Countries and some of its non-member partners, meet next week and will discuss whether or not to maintain, or relax its current set of production restrictions.
The group, led by Saudi Arabia and Russia, in the spring agreed to a historic joint cut of 7.9 million barrels per day in oil output to prevent another collapse in the price. As the shock to demand gradually lessened, OPEC+ eased that limit to 7.7 million barrels per day.
OPEC+ will applaud the tightening in the futures curve, given the signals that sends about demand going forward. ING said there was a risk that the market may be getting ahead of itself, as the group's decision will likely depend heavily on further developments in the rollout of a vaccine, as well as where the oil price is next week.
"The key question there is whether the group will delay easing cuts from 7.7 million barrels per day to 5.8 million barrels per day on 1 January," ING strategist Warren Patterson said. "Clearly, if the market continues to strengthen between now and then, there is the risk that a growing number of members of the deal will become increasingly reluctant to rollover cuts," he added.
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