Oil gains on vaccine hopes, even as virus cases surge

LONDON • Oil rose above US$45 a barrel in London for the first time in 10 weeks as financial markets continued to advance on a vaccine breakthrough and US crude stockpiles appeared to retreat.

Brent futures advanced in tandem with equity markets, having been buoyed initially this week by the election of Mr Joe Biden as United States president, and then Pfizer's vaccine announcement.

At the same time, the overall price structure has strengthened with a sharp narrowing of the spreads between monthly contracts, signalling that fears of oversupply are abating. "There's optimism now that there's light at the end of the tunnel," said Mr Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas. "Expectations around the path to economic recovery, and a recovery in oil demand, have changed and oil prices are reflecting that."

The discount on front-month Brent versus contracts three months out has shrunk to 75 US cents, the smallest gap since July.

In US markets, the spread between June this year and December next year has narrowed to 34 US cents from US$1.34 at the start of the month.

The American Petroleum Institute reported crude inventories dropped by 5.15 million barrels last week, with petrol and diesel also decreasing, according to people familiar with the data. Official government figures are due today. The median estimate in a Bloomberg survey forecast a 1.9 million-barrel decline in crude stockpiles.

However, there are reasons to be wary of the latest price surge.

Covid-19 infections have surged in Europe and the US, with Italy reporting the most fatalities since April and American cities announcing new restrictions. Early findings on a vaccine showed it protected most people from Covid-19, but it is likely to take some time to roll out if it proves effective.

"The giddy risk-on trade of the past couple of days is pricing in future hope, but not the immediate practicalities and realities of a worsening virus surge on both sides of the Atlantic," said Ms Vandana Hari, founder of Vanda Insights in Singapore. BMO Capital Markets also said it is "too soon" for US$50 oil as the market contends with rising Libyan output.

The Organisation of Petroleum Exporting Countries (Opec) member has boosted oil production to over one million barrels a day, a milestone for the North African country after civil war all but shut its energy industry earlier this year.

The next major event for the market is the Opec+ meeting at the end of the month, with Vitol Group predicting a major draw on excess global inventories if the alliance delays a planned easing of cuts.

BLOOMBERG