Tightening Oil Supplies Inject New Momentum Into Price Rally
February 07 2021 - 5:59AM
Dow Jones News
By Joe Wallace
A booming rally in oil markets has pushed crude prices to their
highest levels since near the start of the coronavirus pandemic,
powered by production curbs and recovering demand.
Brent-crude futures, the benchmark in energy markets, have risen
more than 50% since the end of October and are approaching $60 a
barrel for the first time since Covid-19 began to erode oil demand
in early 2020. Futures for West Texas Intermediate -- or WTI, the
main grade of U.S. crude -- last week surpassed $55 a barrel for
the first time in over a year.
The speed of the recovery has surprised some investors and
analysts, given that coronavirus continues to curtail demand. It
has juiced shares of companies including Exxon Mobil Corp. and
ConocoPhillips after a troubled 2020 for oil-and-gas producers,
making energy stocks the best performers on the S&P 500 this
year.
"The market definitely has some momentum," said John Kilduff,
partner at Again Capital LLC, a hedge fund that invests in energy
derivatives. "WTI is going to be targeting $60, too."
Oil is rising against a mixed economic backdrop, with data
published Friday suggesting that the labor market faces a long road
to recovery. But the stock market continues to power higher, in
part because investors expect a new dose of fiscal stimulus and
vaccines to goose growth.
Behind oil's rally: Huge stockpiles that accumulated in the
early stages of the pandemic have winnowed down faster than many
people expected. Traders say that could pave the way for further
price gains if demand, which has already recovered in China and
India, picks up in developed economies.
The fall in inventories is largely down to efforts by the
Organization of the Petroleum Exporting Countries and its allies,
led by Russia, to restrain production. Since agreeing to the cuts
at the peak of the crisis in energy markets in April, producers
have held back a cumulative 2.1 billion barrels of oil, OPEC said
last week.
U.S. companies have also helped to prevent production from
swamping demand. Global appetite for oil remains below pre-pandemic
levels despite a pickup in consumption of gasoline, naphtha and
fuel oil, which is used to heat homes and power ships.
American producers are pumping 17% less crude than they did on
the eve of the pandemic, according to the Energy Information
Administration.
All this has pulled the amount of crude oil and petroleum
products stored around the world down by about 5% since its peak in
2020, according to Morgan Stanley analyst Martijn Rats.
There is no shortage of oil, but one sign the market is
tightening stems from the relationship between current and future
prices. Spot prices have climbed to a premium over prices for crude
to be delivered down the line, showing that traders are willing to
pay more for immediate access to oil.
On Friday, WTI contracts for oil that will be delivered next
month cost $5.16 more per barrel than contracts for crude that will
change hands in March 2022. That is the biggest premium for
front-month futures since the start of the pandemic and contrasts
with a historically large discount last April, when a glut of oil
pushed WTI prices below zero.
"It is a bullish indicator," said Scott Shelton, an energy
analyst and broker at United ICAP. "I don't think there's any
question about that."
Analysts say this dynamic -- known as backwardation -- has been
exaggerated by a slowdown in purchases of long-dated energy
contracts by airlines and other companies that buy them to hedge
fuel prices.
Still, some investors say the condition shows the rally has
further to run. It gives traders an incentive to take oil out of
storage, because they earn more from selling it straight away. That
in turn would bolster prices by whittling down supplies. Lower
forward prices also make it harder for producers to lock in profits
for barrels they will sell in the future, encouraging them to keep
oil in the ground.
Backwardation could encourage more money managers to bet on
crude, said Mark Hume, co-manager of BlackRock's BGF World Energy
fund. When spot barrels of oil fetch a premium, funds earn a profit
when futures approach expiration and they flip their position
forward into cheaper later-dated contracts.
The chance to capture this extra return has drawn investor money
into commodity markets in recent months, adding to existing
bullishness about raw materials, according to Ruhani Aggarwal, an
analyst at JPMorgan Chase & Co.
Still, some analysts think investors are overly optimistic,
saying the oil market faces hurdles including the potential for an
increase in Iranian exports. Plus, new coronavirus variants could
lead to further restrictions on movement.
"Just when we're ready to say we're over with the virus, the
virus isn't over with us," said Helima Croft, global head of
commodity strategy at RBC Capital Markets.
Write to Joe Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires
February 07, 2021 05:44 ET (10:44 GMT)
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