Oil prices extended their gains on Wednesday as Covid-19 vaccine euphoria continues to drive markets, assisted by a report that US crude stockpiles have decreased further than expected for another week.
Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the gains:
"For oil prices to recover their lost pride, a major development to suppress the pandemic was needed. Traders see the current positive vaccine trials as the one and enthusiasm is driving prices to their highest level in 10 weeks.
The vaccine euphoria is widespread and traders ignore other short-term fundamentals, buying on the hype against Covid-19.
Vaccine news, followed by an indication that US crude stockpiles fell more than expected for another week, assisted prices to climb further for a third consecutive day.
Yet the question now is if these price levels are sustainable on the ground, when the enthusiasm subsides.
In our view, oil prices are enjoying the last leg of a vaccine-rally which may fade out soon, as fundamental realities start to sink in. In the current environment, with oil demand on the red against supply, such price levels are not justified for the short-term.
Since crude futures are a combination of anticipatory and spot assets, the current Brent front month future does reflect changes to expectations about supply-demand fundamentals for January 2021.
It seems clear that markets are getting increasingly confident that January balances will be tighter than previously thought. But in order for the market to be correct in that assessment, OPEC+ must refrain from increasing supply by 2 million bpd from January 1st or the demand recovery must accelerate.
The problem is, acceleration in demand will not happen just because of positive news from vaccine trial results – it’s the lockdowns that must succeed in bringing spiraling Covid-cases under control.
New cases in the US have already surpassed 1 million through the first 10 days of November and additional restrictions in the US, such as the stay-at-home recommendation announced in Wisconsin, seem inevitable.
North America is also the laggard in the road traffic recovery regionally, with Europe in second-worst place after the recent lockdown measures, and this won’t turn around any time soon.
There are several obstacles along the way for oil prices to continue to recover further.
The most important hurdle in the short-term is next Tuesday’s OPEC JMMC meeting. So far, there have been many indications from both Saudi Arabia and Russia – the de facto glue of the oil-cutting alliance – that it will be possible to delay the 2 million bpd of production increases starting January 2021.
Have OPEC+ painted themselves into a corner already? It may appear that way.
Lastly, the noise from the legal challenges to the US presidential election results will continue in the background of trader’s minds, but most likely not take centre stage."
Read the article online at: https://www.oilfieldtechnology.com/special-reports/11112020/oil-continues-ascent-on-vaccine-news-us-crude-stock-levels/