Oil rises on projected US crude draws and vaccine confidence -Rystad Energy comments

Oil prices continue their phenomenal rally on projections that US storage levels fell last week and on confidence that vaccine production and distribution will accelerate.

Here is Rystad Energy’s daily market comment from our Head of Oil Markets Bjornar Tonhaugen:

February has so far been a dream month for oil prices that benefit day after day from back to back bullish developments.

Just when the market started wondering if the oil price rise still has legs, another projected draw in US inventories is lifting price levels even higher.

Thinking of it, with Brent racing over $61 dollars, one can only wonder if we are already out of the pandemic, if Covid-19 is a thing of the past. Yet, it’s not, and the prices the market is currently enjoying are purely a result of a supply side support for the moment.

If API projections get matched by official stats and crude inventories fell indeed for another week, this would definitely be an indication that the supply-cut sacrifices that OPEC+ and Saudi Arabia are offering not only work, but have a lasting effect.

Inventory levels are important as they are a price-maker, with storages working as a temporary cushion when demand falters, so that the offered supply can be kept off the market for prices to stay healthy.

Even if the oil price seems like a bubble since the beginning of the week, today’s rise is justified as a result of the projected draw.

Of course oil storage relief is not the only silver lining.

There are fundamental reasons for the rally too, as a recovery in demand is inevitable, only the timing is uncertain. And OPEC+ is still choking the supply taps.

Traders got incremental positive news today from Germany, where a gradual easing of Covid-measures are planned from next month, South Korea approving the AstraZeneca vaccine and BioNTech starting a new vaccine production facility in Germany.

However, all vaccine-related new are forward looking indicators of what the market is already pricing in – a strong demand recovery towards the summer.

The market is getting increasingly lofty and unprepared for a correction in price. When bullish news run out of steam, suddenly traders may realize that ‘wow, we’ve climbed way too high’ and scramble to apply a price correction.

The current price levels are healthier than the actual market and entirely reliant on supply cuts, as demand still needs to recover..

That’s why eyes should start looking at what’s happening with US production. It is important to understand that the production recovery phase for US tight oil is already underway, without much of a lag between the price signal and the response from the industry, like it was in the second half of 2016 and 2017.

This is being largely driven by solid support from an unusually high inventory of drilled but uncompleted (DUC) wells, record-high well performance across multiple basins in the second half of last year and an exceptional maturation of base production.

Hedge funds and other investors have poured money into the long side of the futures market (of course with a seller on the other side), but the hunt for yield in a zero-interest world is undoubtedly supporting the price rally.

With technical oil price indicators screaming “overbought” it is a risky business going into the long side, but the attractive roll yield may lure some more on to the snowball before it potentially starts to roll downhill again.

Read the latest issue of the OGV Energy magazine HERE.