Oil Climbs With Stronger Growth Outlook Allaying Virus Concerns

(Bloomberg) -- Oil rebounded in tandem with a broader rally in commodities as a brighter growth outlook for the world’s economies eased concerns around the impact of a resurgent coronavirus.

Futures rose as much as 3.3% in New York on Tuesday, with most other commodities also climbing on the back of stronger economic data and a weaker dollar. The International Monetary Fund lifted its view of global growth this year for the second time in three months.

Crude plunged on Monday amid rising Covid-19 infections in Europe and an imminent increase in OPEC+ supplies, which could swell further if a nuclear deal with Iran is resurrected. Multiparty negotiations began in Vienna on Tuesday, though the chances of a breakthrough are seen by analysts as slim.

“We’ve had these wild moves for the better part of the past ten days,” said Bob Yawger, head of the futures division at Mizuho Securities. “There’s a recovering economic picture, with an improving vaccine situation in the U.S., on one side of the equation. It’s supply versus demand here for control of the market.”

Oil rallied 22% in the first quarter as the rollout of vaccines spurred optimism that demand would rebound, while the Organization of Petroleum Exporting Countries and its allies kept a tight rein on supply. While the consumption recovery in countries like the U.S. is picking up steam, the global rebound remains shaky. In India, state-run refiners are looking to buy less crude from Saudi Arabia as demand in the Asian nation is poised to dip amid a resurgence of Covid-19, and relations between the two countries sour over prices.

“With supply side support dwindled, marginal price action in oil markets will now shift to demand dynamics, without as much of a safety blanket from the supply side,” TD Securities commodity strategists led by Bart Melek said in a note. “While the demand outlook is expected to improve substantially into the second half of the year, and should keep markets on a tightening path, near term markets are likely to be balanced rather than in hefty deficits as they have been,” weighing on prices.

The oil market’s bullish backwardation structure has flattened in recent weeks, with the closely-watched spread between the nearest December contracts down by about $2 a barrel from its March peak. The decline suggests weakening expectations for the health of the market, though the spread recovered somewhat on Tuesday.

The gradual nature of the return of OPEC+ supplies will prompt a deeper drawdown of global stockpiles in the second quarter, Citigroup Inc. said in a report, as banks retain a positive outlook on the oil market with the northern hemisphere summer approaching.

Yet the potential for a return of Iranian barrels continues to weigh on sentiment. Negotiators from the Islamic Republic and the U.S. will attempt to resurrect the troubled nuclear deal, though the talks face significant hurdles. Tehran has insisted on full sanctions removal for it to scale back nuclear activity, while Washington has ruled out any “unilateral gestures.”

The first round of talks on the nuclear deal ended with parties agreeing to continue consultations at the expert level, Iran’s foreign ministry said in a statement on Tuesday.

In the U.S., crude stockpiles are expected to have fallen last week, according to a Bloomberg survey. The industry-funded American Petroleum Institute will report inventory data later Tuesday ahead of a U.S. government report on Wednesday.

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