Oil joins the vaccine rally

Oil has a torrid time in 2020 with Brent down some 38% and WTI still roughly 55% off where it started the year. Interestingly, this week saw the publication of the US futures market regulator report on the shocking April move which saw prices collapse below $0 and settle at minus $37.63, the first and only time the market has seen negative prices since launching in 1983. The report includes a lengthy discussion on some of the fundamental reasons why oil weakened at the time, such as the drop-off in demand in the early days of the pandemic and the rapidly filling storage tanks at Cushing where traders had to deliver futures contracts not unwound. But the regulator has disappointed some who hoped for more definitive analysis and there is certainly no attempt to pass blame on any areas of the market.

Sentiment turnaround on vaccine hopes

Oil prices have gained around 15% since the first vaccine news broke from Pfizer on 9 November. Effective FDA approval is expected to be granted soon and the better distribution potential of the Astra Zeneca vaccine has all added to the feeling of a way back to normality. The market is now looking through the near-term restrictions and second wave in many parts of the northern hemisphere and seeing oil demand potentially making a quicker recovery in the new year.

Much will depend on what further developments we see on a vaccine as Brent prices hit levels not touched since the collapse in March. Questions still remain over the speed and uptake of any new vaccines with mass rollouts not expected to really impact until mid-2021. Surging Covid cases do still continue in the short-term and prolonged lockdowns and restrictions after the festive period will still weigh on economic activity and transportation demand. The Thanksgiving ‘bump’ to fuel demand will also not materialise this year with the numbers of travelling Americans down by over 50% from last year.

Supply issues to be addressed?

Elevated inventory levels and spare capacity held by OPEC+ are the main issues which need to be resolved to get back to a more balanced oil market. US crude oil and petroleum inventories have recently fallen back from their highs earlier in the year but remain above their five-year averages. The ceasefire in Libya has helped put its production back on line and some OPEC members appear determined to resume production growth from January.

This sets up the OPEC+ meeting next week as a key focus point as prices in the front month futures contract edge higher and the forward curve has recently flattened quite considerably. This tightening will obviously please the oil group, but the critical issue is now if prices continue to strengthen. The risk then is that there is a delay in the easing of cuts due on 1 January as a number of members become more reluctant to do this.

The market is currently expecting a rollover with such an extension helping to bring the global market back into a deficit after a brief return into surplus next month. The precarious nature of the balance sheet into the first quarter of next year means prices may drop to support around $42.70 where the 100-day moving average resides if production cuts are not rolled over. Otherwise, more positive news can see bullish momentum continuing into the December 2018 lows around $50.