A sharp rise in the oil markets has pushed oil prices to their highest levels since near the start of the coronavirus pandemic, driven by production restrictions and recovering demand.
Brent-type oil futures, a benchmark in the 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 to erode oil demand in the beginning 2020. Futures for West Texas Intermediate —or WTI, the main US oil type — last week exceeded $ 55 a barrel for the first time in more than a year.
The speed of the recovery surprised some investors and analysts, as the coronavirus continues to restrict demand. It won shares in companies like Exxon Mobil Corp.
and ConocoPhillips after a problematic 2020 for oil and gas producers, making energy stocks the best performers in the S&P 500 this year.
“The market is definitely excited,” said John Kilduff, a partner at Again Capital LLC, a hedge fund that invests in energy derivatives. “WTI will also target US $ 60”.
Oil is rising in a mixed economic scenario, with data published on Friday suggesting that the labor market faces a long road to recovery. But the stock market continues to grow, in part because investors expect a new dose of fiscal stimulus and vaccines to boost growth.
Behind the rise in oil: the huge stocks that accumulated in the early stages of the pandemic have shrunk faster than many people expected. Traders say this could pave the way for further price gains if demand, which has already recovered in China and India, increases in developed economies.
The drop in inventories is largely due to efforts by the Organization of Petroleum Exporting Countries and their allies, led by Russia, to contain production. Since agreeing to cuts at the height of the energy market crisis in April, producers have held 2.1 billion barrels of accumulated oil, OPEC said last week.
American companies have also helped to prevent production from overwhelming demand. The global appetite for oil remains below pre-pandemic levels, despite an increase in consumption of gasoline, naphtha and fuel oil, which is used to heat homes and ships.
American producers are pumping 17% less oil than 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 around the world by about 5% since its peak in 2020, according to Martijn Rats, an analyst at Morgan Stanley.
There is no shortage of oil, but a sign that the market is contracting comes from the relationship between current and future prices. Spot prices have risen to a premium on oil prices to be delivered along the line, showing that traders are willing to pay more for immediate access to oil.
On Friday, the WTI oil contracts that will be delivered next month cost $ 5.16 more per barrel than the oil contracts that will change hands in March 2022. This is the biggest prize for oil futures. first month since the start of the pandemic and contrasts with a historically large Discount last April, when an excess of oil pushed WTI prices below zero.
“It’s a bullish indicator,” said Scott Shelton, energy analyst and broker at United ICAP. “I don’t think there is any doubt about that.”
Analysts say this dynamic – known as backwardation – has been exaggerated by a slowdown in purchases of long-term energy contracts by airlines and other companies that buy them to protect fuel prices.
Still, some investors say the condition shows that the recovery is yet to come. This gives traders an incentive to remove oil from storage, because they earn more from the immediate sale. This, in turn, would increase prices by reducing supply. Lower future prices also make it more difficult for producers to make profits for the barrels they will sell in the future, encouraging them to keep oil in the ground.
The setback could encourage more money managers to bet on oil, said Mark Hume, co-manager of BlackRock’s BGF World Energy fund. When the barrels of cash in sight bring a premium, the funds make a profit when the futures approach maturity and turn their position into cheaper contracts at a later date.
The chance to get that extra return has attracted investors’ money to the commodity markets in recent months, adding to the existing optimism about raw materials, according to Ruhani Aggarwal, analyst at JPMorgan Chase & Co.
Still, some analysts believe investors are overly optimistic, saying the oil market is facing obstacles, including the potential for increased Iranian exports. In addition, new variants of the coronavirus may lead to further restrictions on movement.
“Just when we are ready to say that the virus is finished, the virus is not finished 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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