Oil Reaches 8-Month High on Vaccine Breakthroughs and 'Surprise' Inventory Draw

One analyst suspects demand recovery in 2021 will be bigger than expected: File Image/PixaBay

A surprise drop in U.S. crude inventories plus rising hopes that vaccines will soon bring the beginning of the end of the Covid pandemic were credited for another strong oil price increase on Wednesday, this time by nearly 2 percent.

Brent rose 75 cents, or 1.6 percent, to settle at $48.61 per barrel - its highest since early March - while West Texas Intermediate rose 80 cents, or 1.8 percent, to $45.71, also its highest since early March.

Government data once again proved analytical expectations wrong by revealing that crude inventories  fell by 754,000 barrels last week compared to predictions of a 127,000-barrel rise.

Also, Brent futures for February delivery traded as much as 14 cents above the January contract, the highest since July, before settling at an 8 cent premium, and this caused Bjornar Tonhaugen, analyst at Rystad Energy, to remark that "Positive vaccine news and swift deployment views are behind a significant part of this move in the curve, supported by increasingly firm beliefs by the market that OPEC+ will extend its current output targets for Q1 2021."

He was referring to the Organization of the Petroleum Exporting Countries and allies including Russia leaning towards delaying next year's planned increase in output despite the recent crude price rally; one source with knowledge of the matter told media, "This increase in prices is about sentiment, but we need to extend to have solid market fundamentals to support the prices, [and] so far, the best choice is the three-month extension."

George Hay, a columnist for Reuters, wrote on Wednesday that given recent events, the International Energy Agency's prediction of no significant boost to demand until the second half of 2021 "is starting to look prematurely glum: there are now four successful vaccine trials, which could allow a swifter return to normal life, [and] that in turn could lead to a quicker recovery in global daily demand, which the IEA currently expects to be 97.1 million barrels next year, compared with 100 million barrels seen in 2019."

But while there is now light at the end of the tunnel for the crude sector, the industry is still struggling with the outcome of government-imposed Covid lockdowns, case in point: Saudi Arabia's exports fell by nearly a third, or 38.7 percent to about 35 billion riyals in September from a year ago, it was reported on Wednesday.

Also, new restrictions in Alberta are said to be impacting Canada's decimated oil patch.