Oil Prices Start Week on a Positive Note

Oil Prices Start Week on a Positive Note
Oil prices started the week on a positive note, capitalizing on recent Covid-19 vaccine news.

Oil prices started the week on a positive note, capitalizing on recent Covid-19 vaccine news with vaccine delivery estimates replacing, in importance, short-term oil demand forecasts.

That’s what Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said in a statement sent to Rigzone on Monday, adding that the most bullish single piece of news came from the U.S., where officials said vaccinations could possibly start from mid-December.

“The thought of starting a vaccination campaign already within 2020 revitalized trader hopes that oil demand could take a little less time to recover,” Tonhaugen said in the statement.

“As oil demand is currently expected to take a hit from the second global round of lockdowns, the early vaccine news offer some light in the tunnel,” he added.

Tonhaugen warned, however, that even if a vaccine gets authorization next month and vaccinations do begin, it will still take months to apply it sufficiently, even in the U.S.

“It is prudent to expect oil demand to take a hit for the next couple of months before recovering, so the problem does not really go away immediately,” Tonhaugen said.

“A real immediate boost can be an expected decision from OPEC+ to maintain production levels and not increase oil output from January, which has already been partly priced in and should it get confirmed next week by the alliance, it will provide some stable floor for oil prices,” he added.

Vaccines and OPEC aside, Tonhaugen noted that there were strong oil demand signals from China. Tonhaugen also outlined that the market got a nudge higher from an increase in the geopolitical risk premium from a missile attack from Yemen on a fuel distribution center in Saudi Arabia.

Looking further ahead, Tonhaugen pointed out a sharp tightening of the time spreads in the Brent and WTI curves.

“The WTI curve in the early part of 2022 is even trading in a slight downwards sloping shape, which means that the market is pricing in that come 1Q 2022, the market will be tight and demand a spot premium over deferred delivery,” Tonhaugen said.

“In other words, the market is saying that when we get to 2022, it is expected that we will be back to something like below normal inventories and spot prices will demand a premium over forward months,” he added.

“That is in our view also totally realistic, but also requires several fundamental developments to pan out. The closest one; OPEC+ needs to taper its cuts in 1Q and keep production in check thereafter in line with the tapered cuts from 2Q21 onwards,” he went on to say.

To contact the author, email andreas.exarheas@rigzone.com


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