Back from the Covid abyss: Oil stages remarkable turnaround; back above $50

US inventories expanded a whopping 15.2 million barrels last week.
Oil in London climbed above $50 a barrel for the first time since the pandemic ground the global economy to a halt in a remarkable rally that few predicted would happen this soon.

Global benchmark futures surged 2.8% Thursday, reaching a nine-month high. The rebound represents a startling turnaround for a market that was brought to its knees earlier this year by an unprecedented loss of demand. With places to store unused oil running out, OPEC and its partners collaborated to stanch outflows and stabilize markets while the world awaited a vaccine.

Announcements last month from Pfizer Inc. and others that safe vaccines could be rolled out by spring boosted the outlook for global consumption. Asia is continuing to lead the rebound in physical demand amid robust purchasing by China’s private refiners. The U.S. dollar also weakened, which raised the appeal for commodities priced in the currency and helped thrust Brent past $50.

“I am a bit surprised that it happened now,” said Bart Melek, the head of global commodity strategy at TD Securities. “I have been advocating $50+ Brent, but I thought that would happen after we see inventories and demand look better.”

It’s possible the market is getting ahead of itself though, with key technical indicators signaling benchmarks are overbought and U.S. inventories recently piling higher.

US inventories expanded a whopping 15.2 million barrels last week in the biggest build in government data going back to 1982, with the exception of one week in April. At the same time, domestic gasoline demand is the lowest it has been for this time of year since 1997, Energy Information Administration data show. And it will be months before the vaccine is distributed widely enough to fully reopen the economy.

Still, supply and demand dynamics have drastically improved from just a few months ago. Inventories are drawing down globally, and there are signs the market is handling increased output better than initially anticipated.

“The distinct FOMO-type shift in financial market sentiment is supported by a global physical market that is absorbing barrels at a more robust-than-consensus pace,” RBC analysts including Helima Croft and Michael Tran said in a report. “Asia refinery runs remain firm, global floating storage levels are being dismantled at a vigorous pace and European mobility is accelerating amid loosening regional lockdowns.”

In addition to the recent surge in the price for near-term contracts, the swift reshaping along oil’s forward curve underscores the confidence in a long-term recovery. The curve is now trading in a structure known as backwardation that makes it profitable to roll contracts from one month to the next, which is also attracting a rush of new flows to the market.

Meanwhile, there are glimmers of a recovery in Europe in addition to Asia’s full-throttle return. The U.K., which emerged from a second lockdown this month, saw road fuel sales jump by almost 10% last week. Fuel use in Brazil has surpassed pre-virus levels. Still, it’s a less certain picture in the U.S., where gasoline consumption has dropped to the lowest since May.

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