Oil's rally, fueled by vaccine progress, is running out of steam
The oil market has rallied almost 40% within the last two months, pushing benchmarks to nine-month highs, in a very euphoric response to progress on COVID-19 vaccines that has investors thinking the tip of the coronavirus pandemic is in view.
Reality struck back on Monday, however, with a selloff driven by the surge in cases within the uk. Infection rates are at their worst levels in numerous countries and vaccine distribution is proving to be slow, which suggests the cycles of lockdowns and travel restrictions will continue - keeping fuel demand tepid for several months.
That means the majority of the rally is already within the car mirror, traders and brokers said. Brent crude hit a nine-month high of $52.48 a barrel last week, but gave back the maximum amount as 4% on Monday, while U.S. crude prices exceeded $49 a barrel before slipping.
"Even when traders see stability, there's always something unexpected which will happen, so inflated prices reveal their glass legs," Rystad Energy's oil markets analyst Louise Dickson said.
The market has rallied sharply from the spring, when a mixture of a price competition between Asian nation and Russia and a crash in demand because of the coronavirus pandemic sent Brent below $20 a barrel and threw U.S. futures into turmoil, with their nadir at negative $40 a barrel.
The rally accelerated within the last two months of the year after several drugmakers announced strong responses to vaccine trials, inspiring hope that life would return to something approximating pre-pandemic normalcy.
But the energy market's fundamentals still warrant caution, analysts said. The Organization of the Petroleum Exporting Countries (OPEC) and also the International Energy Agency (IEA) revised their oil demand estimates for next year lower and also the latter warned that global markets remain fragile.
Oil majors have reduced their expected capital spending for the approaching year, and several other companies have issued dire outlooks on demand. BP (NYSE:BP), in its year-ahead forecasts, doesn't see refinery processing reaching pre-COVID levels for some years in its most optimistic scenario.
The current gasoline refining margin of $9.52 a barrel is undernear two of the last 10 years for now of year.
"We deem global refining margins to be the only most significant fundamental driver for crude prices over the course of the following cycle," RBC Capital Markets analyst Michael Tran said in a very note last week.
OPEC and its allies agreed this month to cut back supply cuts, which is able to add more oil to the worldwide market. U.S. producers are adding supply, as energy firms last week added oil and fossil fuel rigs for the fourth week in a very row.
Monday's decline could also spur more hedge funds to unload positions after piling into bullish bets since early November.
Speculators, including hedge funds and other money managers, have increased net long U.S. crude futures and options positions by over 25% over the last six weeks. Technical signals indicate that Brent prices were recently in overbought territory.
One bright spot: physical grades globally are holding up as China continues purchases. China's crude throughput in November rose 3.2% on year to a record on a usual.
Time spreads in oil, an indicator of future market fundamentals, have rallied, suggesting supply will balance out by early next year. (Graphic: https://tmsnrt.rs/3rjuZZG)
The January-June U.S. crude futures spread has narrowed in recent weeks. Currently, January futures are trading at 35 cents below June futures, compared with $2 below June futures last month, an indication that investors now expect inventories will decline within thehalf of 2021.
However, for late 2021, June barrels are trading nearly 80 cents a barrel on top of December barrels. that implies oversupply could return by the tip of next year, particularly as OPEC boosts production.