An increasing boom in the oil markets has pushed crude prices to their highest level since the onset of the coronavirus pandemic, driven by production offices and the recovery of demand.
Brent crude futures, the benchmark in energy markets, have risen more than 50% since the end of October, approaching $ 60 a barrel for the first time since Covid-19 began eroding oil demand in early 2020. Futures for West Texas Intermediate — or WTI, the most important grade of U.S. crude oil — exceeded $ 55 a barrel for the first time in more than a year last week.
The rapid recovery has surprised some investors and analysts as the coronavirus is still limiting demand. It has softened shares of companies, including Exxon Mobil Corp..
and ConocoPhillips after a difficult 2020 for oil and gas producers, who are performing best on energy supplies this year on the S&P 500.
“The market definitely has some momentum,” said John Kilduff, a partner at Again Capital LLC, a hedge fund that invests in energy derivatives. “WTI is also going to target $ 60.”
Oil is rising against a mixed economic background, with data released Friday suggesting the labor market has a long way to go. But the stock market remains high, in part because investors expect a new dose of fiscal stimulus and vaccines to grow.
Behind the oil show: large stocks that accumulated in the early stages of the pandemic declined faster than many people expected. Traders say it could pave the way for further price increases if demand, which has already recovered in China and India, increases in developed economies.
The decline in inventories is largely due to efforts by the Organization of the Petroleum Exporting Countries and its allies, led by Russia, to curb production. Since agreeing to the cuts at the height of the crisis in the energy markets in April, producers have held back a cumulative 2.1 billion barrels of oil, OPEC said last week.
U.S. companies have also helped prevent demand from overcoming production. The global appetite for oil remains below pre-pandemic levels despite an increase in the consumption of petrol, naphtha and fuel oil, which is used to heat homes and power ships.
According to the Energy Information Administration, US producers are pumping 17% less crude than on the eve of the pandemic.
All of this has reduced the amount of crude oil and petroleum products stored around the world by about 5% since its peak in 2020, according to Morgan Stanley analyst Martijn Rats.
There is no shortage of oil, but one sign that the market is intensifying comes from the link between current and future prices. Spot prices have risen to a premium above crude oil delivery prices, showing traders are willing to pay more for immediate access to oil.
On Friday, WTI contracts for oil delivered next month will cost $ 5.16 more per barrel than contracts for crude that will change owners in March 2022. This is the largest premium for futures contracts since the start of the pandemic and in contrast to a historically large discount in April last year, when a quantity of oil pushed WTI prices below zero.
“This is a bullish indicator,” said Scott Shelton, an energy analyst and broker at United ICAP. “I think there is no question left.”
Analysts say that this dynamic – known as deterioration – has been exaggerated by the slowdown in the purchase of long-term energy contracts by airlines and other companies buying them to hedge fuel prices.
However, some investors say that the condition shows that the rally should continue. This gives traders an incentive to get oil out of storage, as they earn more to sell it right away. This in turn would strengthen prices through the decline in inventories. Lower forward prices also make it harder for producers to include profits for barrels they will sell in the future, which encourages them to keep oil in the ground.
Deterioration could encourage more money managers to bet on crude oil, said Mark Hume, co-manager of BlackRock’s BGF World Energy fund. When coal-fired oil achieves a premium, funds earn a profit when futures contracts expire, and they change their position into cheaper contracts that are later dated.
According to Ruhani Aggarwal, an analyst at JPMorgan Chase & Co., the chance to achieve this extra return over the past few months has attracted investor money to commodity markets.
However, some analysts believe investors are too optimistic, saying the oil market is facing hurdles, including the potential for an increase in Iranian exports. In addition, new coronavirus variants may lead to further restrictions on movement.
“Just when we’re ready to say we’m done with the virus, the virus is not with us yet,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
Write to Joe Wallace by [email protected]
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