A booming rally in oil markets has pushed crude oil prices to their highest levels since near the start of the coronavirus pandemic, fueled by declining production and a recovery in demand.
Brent crude futures, a benchmark in energy markets, have risen more than 50% since the end of October and are approaching $ 60 a barrel for the first time since Covid-19 began eroding oil demand at early 2020. Futures for West Texas Intermediate – or WTI, the main class of American crude oil – last week topped $ 55 a barrel for the first time in over a year.
The speed of recovery has surprised some investors and analysts, as the coronavirus continues to reduce demand. It has acquired shares in companies, including Exxon Mobil Corp.
and ConocoPhillips after a troubled 2020 for oil and gas producers, making energy stocks the best performers on the S&P 500 this year.
“The market certainly has some momentum,” said John Kilduff, a partner at Again Capital LLC, a hedge fund that invests in energy derivatives. “WTI will also target $ 60.”
Oil is rising in a mixed economic environment, with data released on Friday suggesting the labor market is on a long road to recovery. But the stock market continues to grow more, in part because investors expect a new dose of tax incentives and vaccines to raise geese.
Behind the oil rally: the huge stocks accumulated in the early stages of the pandemic fell faster than many people expected. Traders say this could pave the way for further growth if demand, which has already recovered in China and India, returns to developed economies.
The decline in stocks is largely due to the efforts of the Organization of the Petroleum Exporting Countries and its allies, led by Russia, to restrict production. Since agreeing with the cuts at the peak of the crisis in the energy markets in April, producers have held back an accumulated 2.1 billion barrels of oil, OPEC said last week.
American companies have also helped prevent production from increasing demand. Global appetite for oil remains below pre-pandemic levels, despite rising consumption of petrol, naphtha and fuel oil, which is used to heat homes and power ships.
US 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 worldwide by about 5% since its peak in 2020, according to Morgan Stanley analyst Martijn Rats.
There is no shortage of oil, but a sign that the market is tightening comes from the relationship between current and future prices. Spot prices have risen at a premium compared to crude oil prices to be delivered on the line, which shows that traders are willing to pay more for immediate access to oil.
On Friday, WTI oil contracts to be delivered next month cost $ 5.16 a barrel more than oil contracts to change hands in March 2022. This is the highest premium for first-month futures contracts since the beginning pandemic and contrasts with a large historical reduction in April last year, when an excess of oil pushed WTI prices below zero.
“It’s a key indicator,” said Scott Shelton, an energy analyst and broker at United ICAP. “I don’t think there’s a question about that.”
Analysts say the momentum – known as downgrading – has been exaggerated by a slowdown in the purchase of long-term energy contracts by airlines and other companies that buy them to cover fuel prices.
However, some investors say the condition shows that the rally will continue. It gives traders an incentive to take the oil out of the warehouse, as they earn more from the immediate sale. This, in turn, would increase prices by reducing supply. Lower futures prices also make it harder for producers to block profits for the barrels they will sell in the future, encouraging them to keep oil in the ground.
Backwardation could encourage more money managers to bet gross, said Mark Hume, co-manager of BlackRock’s BGF World Energy fund. When spot oil barrels get a premium, the funds make a profit as the future nears expiration and returns to cheaper contracts with later dates.
The chance to capture this additional return has attracted investors’ money in commodity markets in recent months, adding to the existing growth in commodities, according to Ruhani Aggarwal, an analyst at JPMorgan Chase & Co.
However, some analysts say investors are overly optimistic, saying the oil market faces obstacles, including the potential for an increase in Iranian exports. In addition, new variants of coronavirus could lead to additional restrictions on movement.
“Even when we’re ready to say we’re done with the virus, the virus isn’t over with us,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
Write to Joe Wallace at [email protected]
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