Oil Down On Infection Concerns, But Fundamentals Are Improving

Kemp predicts a cyclical upswing for crude in 2021: File Image/Pixabay

Despite vaccines that will put an end to the pandemic and eventually restore demand, crude traders on Thursday were focused exclusively on the short term - meaning, the continuing rising infection rates, which caused traders to lower oil prices, albeit minimally.

Brent settled down 14 cents to $44.20 per barrel, and West Texas Intermediate slipped 8 cents to settle at $41.74 per barrel.

One reason for the minimal fall is that although the infection headlines inevitably generate fear, fundamentals are improving, to wit: although U.S. crude inventories rose 768,000 barrels last week, this was far less than the 1.7 million barrels analysts had expected; and distillates fell by 5.2 million barrels, far more than expected.

Also, the Brent price contango in which near-month barrels are cheaper than later month barrels (implying current oversupply), was at its shallowest in over four months, suggesting that glut concerns are easing.

This caused John Kemp, commodities analyst at Reuters, to speculate on Thursday that "Falling inventories are likely to herald a tighter production-consumption balance and a cyclical upswing in both spot prices and calendar spreads next year, which are already being anticipated by oil traders in rising futures prices."

However, he conceded that a cyclical upturn in the oil market "depends on OPEC+ timing production increases carefully, on the global economy avoiding a double-dip recession, and on the rapid deployment of an effective coronavirus vaccine.......there appears to be a reasonable prospect for all three conditions being met."

Meanwhile, business continues in the energy sector as normally as possible, with France's Total currently in talks to increase energy investment in Libya (where daily output has already recovered to 1.25 million barrels), and Norway offering new exploration licenses in the Arctic despite various groups opposing the permits for environmental reasons.