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A booming recovery in oil markets has pushed crude prices to their highest levels since the onset of the coronavirus pandemic, fueled by production brakes and resumption in demand.
Futures contracts on Brent, the benchmark in energy markets, have risen more than 50% since late October and are approaching $ 60 a barrel for the first time since Covid-19 began to erode demand of oil in early 2020. Futures for West Texas Intermediate – Or WTI, America’s premier crude grade – last week topped $ 55 a barrel for the first time in over a year.
The speed of the recovery has surprised some investors and analysts, as the coronavirus continues to reduce demand. He has mined shares of companies including Exxon Mobil Corp.
and ConocoPhillips after a troubled 2020 for oil and gas producers, making energy stocks the best performing on the S&P 500 this year.
“The market definitely has some momentum,” said John Kilduff, partner at Again Capital LLC, a hedge fund that invests in energy derivatives. “The WTI will also target $ 60.”
Oil rises amid mixed economic backdrop, with data released Friday suggesting the labor market faces a long road to recovery. But the stock market continues to gain momentum, in part because investors expect another dose of fiscal stimulus and goose growth vaccines.
Behind the Oil Rally: The huge stocks that built up in the early stages of the pandemic were being winnowed out faster than many thought. Traders say this could pave the way for further price gains if demand, which has already recovered in China and India, picks up in developed economies.
The drop in inventories is largely due to efforts by the Russian-led Organization of the Petroleum Exporting Countries and its allies to limit production. Since agreeing to the cuts at the height of the crisis in energy markets in April, producers have withheld 2.1 billion barrels of oil in total, OPEC said last week.
American companies have also helped keep production from overwhelming demand. Global appetite for oil remains below pre-pandemic levels despite a resumption in consumption of gasoline, naphtha and fuel oil, which is used to heat homes and power ships.
American producers are pumping 17% less crude than they did on the eve of the pandemic, according to the Energy Information Administration.
All of this has reduced the amount of crude oil and petroleum products stored around the world by around 5% since its peak in 2020, according to Martijn Rats, analyst at Morgan Stanley.
There is no shortage of oil, but one of the signs that the market is tightening comes from the relationship between current and future prices. Spot prices have climbed at a premium to crude prices down the line, showing that traders are willing to pay more for immediate access to oil.
On Friday, the WTI oil contracts to be delivered next month will cost $ 5.16 more per barrel than the crude oil contracts which will change hands in March 2022. This is the biggest premium for the futures contracts of the first month since the start of the historically significant rebound in April, when an oil glut pushed WTI prices below zero.
“It’s a bullish indicator,” said Scott Shelton, analyst and energy broker at United ICAP. “I don’t think there is any doubt about it.”
Analysts say this dynamic – known as demotion – has been exaggerated by a slowdown in purchases of long-term energy contracts by airlines and other companies who buy them to cover fuel prices.
Still, some investors say the condition shows the rally has yet to run. This gives traders an incentive to take the oil out of storage because they earn more by selling it immediately. This would increase prices by reducing supplies. Falling futures prices also make it more difficult for producers to lock in profits for the barrels they sell in the future, encouraging them to keep the oil in the ground.
The backwardation could encourage more fund managers to bet on rough, said Mark Hume, co-manager of BlackRock’s BGF World Energy fund. When barrels of spot oil pay a premium, funds make a profit as futures contracts close to expiration and they convert their position into later cheaper contracts.
According to Ruhani Aggarwal, analyst at JPMorgan Chase & Co., the chance to capture this extra return has drawn investor money into the commodities markets in recent months, adding to the existing uptrend in commodities.
Still, some analysts believe investors are overly optimistic, saying the oil market faces hurdles, including the potential for increased Iranian exports. Additionally, new variants of the coronavirus could lead to further restrictions on movement.
“Just when we’re ready to say we’re done with the virus, the virus isn’t done with us,” said Helima Croft, global head of commodities strategy at RBC Capital Markets.
Write to Joe Wallace at [email protected]
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