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Oil price rallies to 8 months high on US transition, COVID-19 vaccine

Oil price yesterday rose to highs not seen since the COVID-19 pandemic hit the global oil and gas industry early in the year.

The factors that pushed prices high were mainly the commencement of the United States Presidential Transition as President Trump accepts defeat and directs and improved COVID-19 vaccine prospects, which raises optimism across markets with the belief that end of the pandemic is near.

According to Bloomberg, prices rose 4.3 per cent in New York to the highest since early March. The forward curves for both West Texas Intermediate and Brent have strengthened thanks to rising demand from Asia and progress toward a widespread vaccine rollout. The rally accelerated with the start of a formal transition process to U.S. President-elect Joe Biden sending The Dow Jones Industrial Average past 30,000 for the first time.

Meanwhile, the industry-funded American Petroleum Institute was said to report that U.S. crude supplies rose 3.8 million barrels last week. The report also showed an increase in gasoline inventories, but a draw in distillate stockpiles.

“The fact that we have more certainty on what hopefully is an orderly transition is putting some wind in the sails for crude,” said Stewart Glickman, energy equity analyst at CFRA Research. “The biggest issue ahead is how willing they’ll be to cross the aisle and enable a stimulus package to happen. That’s going to be a primary driver” for prices.

The start of the transition process for the U.S. presidency offers a welcome sense of certainty following disputes over the outcome of the November 3 election. Additionally, reports that Biden is planning to tap former Federal Reserve chair Janet Yellen for Treasury Secretary is also raising hopes for more economic stimulus that could provide a much needed demand boost.

One of the most significant shifts in the shape of the forward curve is the strengthening of the so-called WTI red spread, with futures for December of next year at a premium relative to December 2022. The move to backwardation often attracts passive flows into the market, leading to further price rallies. The spread between Brent’s nearest contracts also flipped this week to the bullish structure.

Still, some concerns linger over whether the Organization of Petroleum Exporting Countries and its allies can keep output in check with rising crude prices possibly tempting some of the most cash-strapped members. The producer group meets at the end of the month to discuss whether to delay its planned tapering of output cuts in January.

“People may be getting a little bit ahead of themselves,” said Michael Lynch, president of Strategic Energy & Economic Research. “The question becomes what happens on the supply side now, especially with OPEC’s ministerial meeting coming up. Are they going to be able to convince countries to hold the line if prices are recovering?”

West Texas Intermediate for January delivery traded at $44.81 a barrel after settling at $44.91 a barrel. The contract earlier rose as much as five per cent to over $45 a barrel for the first time since March.    Brent for January settlement added $1.80 to $47.86 a barrel. Both benchmarks are at the highest since March 5.

But while the market may be strengthening on the outlook for improved demand in the near future, the pandemic’s effects are still rippling around the globe. Total SE said it will halt its Donges refinery for several months as it’s currently unprofitable due to weak demand. Several refineries in the U.S. have shut because of the collapse in fuel demand.

While inventories at the nation’s biggest storage hub in Cushing, Oklahoma, should ultimately tighten, WTI timespreads face further weakness in the near term amid rising Canadian supplies and risks to refining demand, according to a BofA Global Research report. The API report showed a draw in supplies at Cushing. Inventories there have steadily climbed over recent weeks to levels last seen in May.

“Over the coming months, Canadian supply will likely recover further as oil sands operations are restored, but production in the Bakken, Niobrara, and Oklahoma will likely be nearly flat versus current levels,” the BofA Global Research report said. “This, combined with the potential for weaker refinery demand on lockdowns could push Cushing inventories higher in the coming weeks.”

Also, in August 2020, U.S. offshore production fell by the most on a monthly basis since September 2008, due to several hurricanes. Offshore output fell by 453,000 barrels per day (bpd) reflecting a decline of 27 per cent. This made production to fall to 1.2 million barrels per day for the month, a seven-year low. The drop in production also aided oil price rise.

However, the Energy Information Administration (EIA) expects oil output to recover to nearly 1.92 million barrels per day by December 2020.

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