The price of oil extended a rally from the highest level in more than a year on signs the global market is tightening and demand is improving.
Futures in London climbed above $61 a barrel after surging 9% over the past seven sessions as oil continued a robust recovery from the Covid-19 pandemic that eviscerated fuel demand. Trafigura Group sees prices moving even higher as refiners increase processing rates to meet rising product demand, while crude stockpiles in the US are forecast to have dropped further last week.
Key prompt timespreads for global benchmark Brent and US crude are in a bullish backwardation structure and firming, making it unattractive to hoard oil on ships and helping to unwind global stockpiles built up during the outbreak.
The oil price surge since the end of October has been underpinned by Covid-19 vaccine breakthroughs and a more recent pledge by Saudi Arabia to deepen production cuts. Slowing coronavirus infections across the globe is raising optimism fuel consumption will continue to climb, although there are signs the recovery will be uneven in the near-term as some regions grapple with the spreading virus.
“Fundamentally, we are seeing the pace of tightening picking up, with the additional Saudi cuts in effect,” said Warren Patterson, head of commodities strategy at ING Bank NV. “We are at levels where we should see quite a bit of producer hedging taking place, which should start to provide some resistance.”
Brent for April settlement added 0.9% to $61.11 on the ICE Futures Europe exchange at 2:03 p.m. Singapore time after jumping 2.1% in the previous session.Futures closed at the highest level since January 2020.
West Texas Intermediate for March delivery climbed 0.9% to $58.46 on the New York Mercantile Exchange after rising 2% on Monday.
Crude futures gained 3.4% to 374.5 yuan a barrel on the Shanghai International Energy Exchange.
Trafigura is “shifting significant volumes of crude oil at the moment,” Ben Luckock, co-head of oil trading, said on Friday in a series of bullish comments on the market outlook. However, Gunvor sees gains beyond $60 a barrel as unlikely because it would prompt energy companies to boost output.
U.S. crude stockpiles, meanwhile, fell by 250,000 barrels last week, according to the median estimate in a Bloomberg survey. If confirmed by official data on Wednesday, that would be a third straight weekly decline. However, gasoline inventories may see a build of 2.1 million barrels.
Despite the rally gaining momentum recently, one technical indicator is signaling oil is overbought and due for a correction, and top traders Vitol SA and Gunvor Group Ltd. have expressed caution about the surge in prices.