Oil Edges Higher With Supply Tightness Countering Virus Comeback

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Oil Edges Higher With Supply Tightness Countering Virus Comeback

Elizabeth Low

(Bloomberg) -- Oil edged higher in Asia -- after the first back-to-back weekly declines since October -- as investors weighed continued supply discipline from producers against a worsening short-term demand outlook.

Futures in New York traded above $52 a barrel after falling 0.3% on Friday. OPEC and its allies estimated they implemented 99% of their agreed oil-supply curbs in January, according to a delegate who asked not to be named. Chevron Corp., meanwhile, said it will wait until it has a firmer read on the trajectory of the pandemic and OPEC+ before resuming its plan to increase shale output.

See also: Asian Fuel Recovery Faces Hurdle as Virus to Boost China Exports

A Chinese purchasing managers’ index for manufacturing missed estimates for January, showing that efforts to rein in Covid-19 are starting to affect Asia’s largest economy. A top health adviser to President Joe Biden warned Sunday that a new variant of the virus circulating in the U.K. will likely become the dominant strain in the U.S. and may lead to curbs on in-person gatherings.

The demand outlook, offset by tight supply and a surge of investment in commodities, has seen crude trade near $52 a barrel over the past couple of weeks. The European Union’s botched vaccine rollout is causing consternation among investors, while in Israel -- where 30% of people have been vaccinated -- the emergence of more infectious variants is overwhelming hospitals.

The medium-term outlook for oil looks good, but there are near-term risks around the virus and vaccine rollouts, said Stephen Innes, chief global strategist for Axi. “The market is growing concerned with the vaccine effectiveness to the mutant strains after Israel had to extend its lockdown.”

While headline prices have lacked direction, the futures curve is pointing to a more balanced market with Brent moving further into backwardation, a bullish structure that signals tightness of supply. The global crude benchmark’s prompt timespread is 22 cents a barrel in backwardation, compared with a contango of 7 cents at the beginning of January.

See also: Saudi Arabia’s Oil Fears Look Well Founded: Julian Lee

The rebalancing of the oil market continues to beat Goldman Sachs Group Inc.’s above-consensus expectations, the bank said in a note. There should be an average 900,000 barrel-a-day deficit in the first half, compared with an earlier estimate of 500,000, Goldman said in the note dated Jan. 31.

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