U.S. crude futures eyeing $50 as U.S. stimulus hopes strengthen
Oil continued its rally as U.S. lawmakers work to settle disputes over another round of fiscal stimulus that could help support demand as markets await a wider vaccine roll-out.
Futures rose as much as 1.4% in New York on Friday, heading toward toward $50 a barrel for the first time since February. The rally signals a sharp reversal in the market that saw prices fall below zero just eight moths ago after the pandemic wiped out demand.
Prices have gained support this week on signs of progress on a U.S. virus relief package, with Senate Majority Leader Mitch McConnell saying he's "even more optimistic now" that an agreement is near. Recent progress in rolling out a covid-19 vaccine has also raised optimism, with the U.S. this week beginning to administer shots and the country's Food and Drug Administration working quickly toward authorizing Moderna Inc.'s vaccine.
"Expectations of a stimulus deal, a slumping U.S. dollar and optimism surrounding the vaccine deployment are fueling a fiery recovery in energy markets, despite fears of a post-holiday surge in Covid-19 cases," Bart Melek, head of global commodity strategy at TD Securities said in a note.
Yet, there are signs the market's rally is due for a pause. Brent's nearest timespread slumped back into a bearish contango on Thursday, a market structure where nearby futures trade at a discount to later ones. That comes as premiums for real-world barrels are easing. Meanwhile, additional U.S. fiscal stimulus still faces obstacles as several sticking points on the aid package delay an agreement.
"Stimulus will be good for demand, but it's probably mostly priced into the market already," said Michael Lynch, president of Strategic Energy & Economic Research. "We have a pretty good sense of what the stimulus package is going to look like."
West Texas Intermediate for January delivery rose 59 cents to $48.95 a barrel at 10:33 a.m. New York time. Brent for February settlement gained 56 cents to $52.06 a barrel.
The spreading virus and lockdowns are weighing on demand, but the hit is much smaller than earlier in the year and is likely only a speed bump to rebalancing the market, according to a Goldman note. This will leave the oil market range-bound and choppy in coming weeks as vaccine enthusiasm is followed by headlines on tighten pandemic restrictions, the bank said.
Recent price gains may be a bit premature, with the demand recovery remaining bumpy, according to a note from UBS Group. A material increase in oil demand is unlikely before the second quarter of 2021, the bank said.