Over the past month, the two oils have rebounded rapidly. Tuesday U.S. trading, the United States and cloth two oil continued to rise, up more than 4% on the day. Near midnight, WTI crude oil futures stood at $45/barrel, up 4.46% during the day; Brent crude oil futures are now at $47.77/barrel.
At the end of October, oil prices had gone through a dark period, mainly due to renewed blockades in Europe, fueling fears of weak demand, what exactly happened in the oil market in November? Let’s take a look at the latest fundamentals in the crude oil market.
Vaccine News Boosts Oil Market
First the vaccine news. News of a breakthrough in Pfizer’s vaccine two weeks ago boosted oil prices, followed by announcements from U.S. pharmaceutical company Moderna and this week from AstraZeneca, which both announced vaccine trials that were more than 90% effective.
JPMorgan analysts Tracey Allen and Natasha Kaneva said in a report Monday that the good news on the neocon vaccine outweighed the risk of an outbreak backlash, pushing up industrial metals, agricultural commodities and bulk commodities across the board. The improved outlook for vaccines amid a weaker dollar has boosted the appeal of the commodity asset class, with investors turning more bullish on commodities. Both WTI and Brent crude oil were among the best performing commodities.
Brent Crude Spreads Near Spot Premiums
The spread between WTI and Brent crude oil, which had remained within a narrow range of $8/bbl for most of the previous six months, has narrowed to $3/bbl.
Demand for crude oil is indeed recovering in some regions, and the market remains optimistic about the future outlook, despite continued weak demand in Europe.
What we need to watch closely is the Brent crude spread. 1 month expiry and 2 month expiry Brent crude futures contracts are now approaching futures premiums. Usually this happens either because the futures contract is about to expire or because investors are very bullish on the future of crude oil, which is clearly the case at the moment.
The spread chart for Brent futures contracts expiring in 2 months and 3 months shows a similar pattern.
Considering that Europe, the main market for Brent crude oil, is still under blockade and that some of the restrictions are not expected to be lifted until early to mid-December, the price action in the spot market is very interesting.
China’s Increased Imports Accelerate Depletion of Crude Oil Inventories
In Asia, especially in China, the demand for oil is rising every year. China’s increased crude oil imports have greatly accelerated the depletion of crude oil inventories.
In fact, oil market demand over the past 40 days has been concentrated in Asia, particularly in China and India. Previously, between July and October, China’s purchases of crude oil declined, and it now needs to buy more crude oil to make up the shortfall.
Today, China’s floating reserves have fallen to around 30 million barrels, but that number is no longer important. What we need to focus on now is China’s purchases of physical crude oil, especially in spread option contracts like Brent crude.
Oil prices are expected to approach the important $49 mark.
Technically, WTI crude oil has now broken through the short-term technical barrier at $43.30.
HFI Research notes that if oil prices can hold above $43.30, they could reach the $49 per barrel level they were at before the new crown outbreak.
Despite the reimposition of the European blockade, global oil inventories continue to decline at an accelerating pace and prices look set for a spike. The rapid rebound in demand for crude oil on the back of a favorable vaccine, narrowing spreads across maturities, and continued inventory declines have all contributed to the recent surge in oil prices.
At the same time, technical support will make market participants more optimistic about oil prices, and once oil prices break above $43.30, they are expected to approach the $49 mark.
For energy investors, the 2014-2020 bear market is incredibly damaging. However, according to the logic of commodity supply and demand, “low prices improve low prices,” meaning that if crude oil prices fall to a certain point, producers will reduce supply, while low prices will stimulate demand for purchases, and eventually supply and demand will change from oversupply to undersupply, affecting crude oil prices.
According to HFI Research, through a deep understanding of the fundamentals of the crude oil market, we can basically determine that we are about to enter a bull market. Investors should take advantage of the upcoming bull market by investing in real assets such as precious metals and energy stocks.
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