Oil futures in London blew past $50 a barrel for the first time since the pandemic ground the global economy to a halt in a remarkable rally that few predicted would happen this soon.
The return to prices levels not seen since March while the pandemic grinds on represents a startling turnaround for a market that just months ago was brought to its knees by an unprecedented loss of demand. With places to store unused oil running out and low prices pushing U.S. shale drillers into bankruptcy, OPEC and its partners collaborated to stanch outflows and stabilize markets while the world awaited a vaccine. Announcements last month from Pfizer Inc and others that safe vaccines could be rolled out by spring, lending a crucial boost to global demand for fuels, provided the boost that was needed to send crude spiraling above $40.
Futures in London rose as much as 4.5% Thursday. Asia continues to lead the rebound in physical demand with robust purchasing by China’s private refiners. A top Indian processor has issued multiple tenders to acquire oil. The U.S. dollar also weakened, which raised the appeal for commodities priced in the currency.
Still it appears the suddenness of Thursday’s rally caught some oil watchers off guard.
“I am a bit surprised that it happened now,” said Bart Melek, the head of global commodity strategy at TD Securities. “I have been advocating $50+ Brent, but I thought that would happen after we see inventories and demand look better.”
It’s possible the market will see some more hiccups in the near term. U.S. inventories expanded a whopping 15.2 million barrels last week, that was the biggest build in government data going back to 1982 with the exception of one week in April. At the same time, U.S. gasoline demand is the lowest it’s been for this time of year since 1997, Energy Information Administration data show. And it will be months before the vaccine is distributed widely enough to fully reopen the economy.
However, in addition to the recent surge in the price for near-term contracts, the swift reshaping along oil’s forward curve underscores the confidence in a long-term recovery. The curve is now trading in a structure known as backwardation that makes it profitable to roll contracts from one month to the next, which is also attracting a rush of new flows to the market.
“Now that we’ve already started the deployment of vaccines in some part of the world, there is optimism about the normalization of the global economy and therefore higher oil prices,” Melek said.
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There are glimmers of a recovery in Europe in addition to Asia’s full-throttle return. The U.K., which emerged from a second lockdown this month, saw road fuel sales jump by almost 10% last week. Fuel use in Brazil has surpassed pre-virus levels. Still, it’s a less certain picture in the U.S., where gasoline consumption has dropped to the lowest since May.
Also read: The Essex Boys: How Nine Traders Hit a Gusher With Negative Oil
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— With assistance by Alex Longley, Sheela Tobben, and Robert Tuttle
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December 10, 2020 at 06:40AM
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