Oil Curve Rally Shows No Let Up, Lifted by Vaccine, Demand

(Bloomberg) — Forward oil prices once again strengthened in ways that indicate both tighter physical availability of crude, but also a brighter outlook for consumption once vaccines against Covid-19 start to take effect.

The nearest December Brent futures are now trading at a higher level than the same contracts for December 2022, surging to the highest premium since February on Thursday. The structure, known as backwardation, signals expectations for a tighter supply-demand balance next year. That can be seen in the marked flattening of the oil futures curve over recent weeks.

chart: Doing Backflips

© Bloomberg
Doing Backflips

The more immediate parts of both Brent and WTI curves are also showing signs of strength amid a growing appetite for oil from Asia, and a healthier North Sea market, where many of the world’s international crudes are priced. The amount of crude floating on tankers in the region is starting to dwindle, while flows to Asia from the North Sea are at a six-month high.

It’s a similar picture in the U.S., where the December 2021 to December 2022 spread for West Texas Intermediate crude surged on Wednesday, and strengthened again today. And with a flotilla of tankers expected to haul U.S. oil Asia this month, the shorter-term spread between WTI’s January and February contracts on Wednesday reached its strongest since July.

chart: Brent & WTI curves flash bullish signals

© Bloomberg
Brent & WTI curves flash bullish signals

Oil futures are also benefiting from optimistic updates on the roll-outs of vaccines to combat the Covid-19 pandemic. On Wednesday, Britain’s drug regulator cleared the Covid-19 vaccine from Pfizer Inc. and BioNTech SE for emergency use, ahead of the U.S. Food and Drug Administration and its European Union counterpart.


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The market structure has also flattened as producers take advantage of higher prices to boost their hedging levels. WTI for 2021 has been above $45 a barrel in recent days, making it more attractive for producers to lock in supplies. That has also shown up in positioning data, with the dealers who sell such hedges boosting their short positions by the most since March last week.

The recent shift in the curves is another factor complicating the OPEC+ alliance’s attempts to thrash out a production accord. While the market consensus was for OPEC+ producers to extend the current output curbs by three to six months, higher oil prices have increased the chances of the group agreeing on a shorter time-frame, Citigroup analysts said in a note.

(Updates with latest spreads information throughout.)

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