A boom in oil markets has pushed crude oil prices to their highest levels since the start of the coronavirus pandemic, driven by production slows and recovering demand.
Brent crude futures, the benchmark in the energy markets, are up more than 50% since the end of October, approaching oil demand for the first time since Covid-19 in early 2020. West Texas Intermediate futures – or WTI, US crude oil’s main quality – surpassed $ 55 a barrel for the first time in more than a year last week.
The speed of the recovery has surprised some investors and analysts as the coronavirus continues to limit demand. It has won shares of companies including Exxon Mobil Corp.
and ConocoPhillips following a turbulent 2020 for oil and gas producers, making energy stocks the best performing on the S&P 500 this year.
“The market is certainly momentum,” said John Kilduff, partner at Again Capital LLC, a hedge fund that invests in energy derivatives. “WTI will also target $ 60.”
Oil is surging against a mixed economic backdrop, with data released Friday suggesting the labor market is headed a long way to recovery. But the stock market continues to rise, in part as investors expect a fresh dose of fiscal stimulus and vaccines to boost growth.
Behind the rise of oil: Huge supplies that accumulated in the early stages of the pandemic have been thrown away faster than many people expected. Traders say this could pave the way for further price hikes if demand, which has already recovered in China and India, picks up in developed economies.
The decline in inventories is largely due to efforts by the Organization of Petroleum Exporting Countries and its allies, led by Russia, to curb production. Since agreeing to cutbacks at the height of the energy market crisis in April, producers have held back a total of 2.1 billion barrels of oil, OPEC said last week.
US companies have also helped keep manufacturing from flooding demand. Global oil hunger remains below pre-pandemic levels, despite an increase in the consumption of gasoline, naphtha and heating oil, which is used to power homes and ships.
According to the Energy Information Administration, US producers are pumping up 17% less crude oil than on the eve of the pandemic.
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 stems from the relationship between current and future prices. Spot prices have risen to a premium over crude oil prices to be delivered down the line, showing that traders are willing to pay more for instant access to oil.
Friday, WTI contracts for oil to be delivered next month will cost $ 5.16 more per barrel than crude oil contracts that will change hands in March 2022. That is the largest first month futures premium since the pandemic began and contrasts with a historically large discount last April, when an abundance of oil pushed WTI prices below zero.
“It’s a bullish indicator,” said Scott Shelton, an energy analyst and broker at United ICAP. “I don’t think there’s any question about that.”
Analysts say this dynamic – known as backwardation – is exaggerated by a slowdown in purchases of long-term energy contracts by airlines and other companies buying them to hedge fuel prices.
Still, some investors say the situation shows that the rally should continue. It gives traders an incentive to take oil out of storage as they earn more by selling it right away. That, in turn, would drive up prices by reducing stocks. Lower forward prices also make it more difficult for producers to lock in profits for barrels they will sell in the future, encouraging them to keep oil in the ground.
Backwardation could encourage more money managers to bet on crude oil, said Mark Hume, co-manager of BlackRock’s BGF World Energy fund. When spotting barrels of oil are at a premium, funds earn a profit as futures near their expiration date and they flip their position to cheaper, later dated contracts.
According to Ruhani Aggarwal, an analyst at JPMorgan Chase & Co., the opportunity to achieve this additional return has drawn money from investors to the commodities markets in recent months, adding to the existing optimism about commodities.
Still, some analysts think investors are overly optimistic, saying the oil market faces hurdles, including the potential for an increase in Iranian exports. In addition, new coronavirus variants can lead to further movement restrictions.
“Just when we’re ready to say the virus is over, the virus isn’t over for us,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.
Write to Joe Wallace at [email protected]
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