Oil futures rose sharply Tuesday, with the U.S. and global benchmarks both closing at levels last seen before a market swoon in March, as investors continued to cheer progress toward a COVID-19 vaccine and the White House removed a roadblock to a smooth transition for the incoming Biden administration.
The U.S. benchmark, West Texas Intermediate crude for January delivery rose $1.85, or 4.3%, to end at $44.91 a barrel on the New York Mercantile Exchange. January Brent crude the global benchmark, was up $1.80, or 3.9%, to close at $47.86 a barrel on ICE Futures Europe. Both benchmarks saw the highest finish for a front-month contract since March 5.
Moreover, the January Brent contract moved to a premium to the February BRNG21 contract on Monday, a condition known as “backwardation.” That phenomenon, along with a fading “contango” — a condition in which longer dated contracts trade at a premium to the near-term contracts — along the futures curve was seen by traders as a positive signal for demand.
“The switch from contango to backwardation is huge because storage economics do not work,” said Robert Yawger, director of energy at Mizuho Securities U.S.A., in a note. “Backwardation is a price structure that implies elevated demand and/or shortage of supply…When storage economics do not work, then storage tends to draw down, supporting prices.”
See: Fears of a COVID-inspired oil glut? Fading ‘contango’ tells a different story
Analysts said progress toward vaccines by several drugmakers has provided a bullish backdrop for crude.
Video: Brent may touch $50 a barrel or higher by the second half of 2021: JTD Energy Services (CNBC)
“Optimists appear to be gaining the upper hand, especially as hardly a day now passes without reports of successful vaccine tests. This is making the market increasingly confident that the economy will quickly normalize, and with it oil demand, despite current data offering no reason for optimism,” said Eugen Weinberg, commodity analyst at Commerzbank, in a note.
Oil’s gains come as equities continue to push higher, buoyed by rising appetite for risk by investors despite a continued surge in COVID-19 cases. The Dow Jones Industrial Average traded above 30,000 for the first time on Tuesday, with support also tied to the Trump administration clearing the way for the transition process to begin.
While investors had been preparing for Democrat Joe Biden to become president in January following his Nov. 3 election victory, the move eased fears over a protracted spat as Trump’s long-shot efforts to overturn the results produced a string of legal defeats for his campaign.
Expectations the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, will agree next week to delay a relaxation of output curbs scheduled for Jan. 1. were also a bullish factor, analysts said.
Weinberg noted that Libya, which wasn’t subject to the existing output cuts, has seen its production rise to over 1.2 million barrels a day after resuming earlier this year after local military commanders lifted port blockades.
He noted that Libya’s National Oil Corp. has indicated it would commit to the OPEC+ agreement if it achieved production of 1.7 million barrels a day — a level that likely equates to the country’s maximum production capacity.
“This misses the whole point of the concept of voluntary reduction and cooperation,” Weinberg said.
Meanwhile, December gasoline rallied 4.5% to finish at $1.2582 a gallon, while December heating oil advanced 3.7% to end at $1.3595.
January natural-gas futures gained 2.4% to close at $2.775 per million British thermal units.