Oil Advances From Highest Since 2018 on Bullish Demand Outlook

(Bloomberg) -- Oil extended gains amid signs of a recovery in demand in parts of the western world, and after OPEC+ provided an upbeat assessment of the market’s outlook.

Futures in New York rose as much as 1.3% on Wednesday. U.S. gasoline demand was the highest since the pandemic began last week, according to Descartes Labs, while traffic on U.K. roads was higher than pre-pandemic levels for the first time.

The market’s structure has rallied, with the spread between the nearest two December contracts for West Texas Intermediate heading for the strongest close since 2019. That gauge indicates growing expectations for market tightness.

“Demand is projected to grow at a fast clip in response to massive pent-up demand for mobility,” TD Securities commodity strategists led by Bart Melek said in a note. “The market is set to face considerable deficits in summer months before the group of producers ramp up the pace on their unwind from extraordinary supply management.”

U.S. benchmark crude’s rally to a two-and-a-half year high this week has been aided by an indication that world powers and Iran aren’t likely to revive a 2015 nuclear deal any time soon. There was an agreement would be reached this month, but participants in the talks are set to head back to their capitals after meeting Wednesday, cooling speculation that the U.S. might soon lift sanctions on Iranian oil exports.

“The bar for OPEC+ has been lowered in recent weeks and months given all the money that is pouring into commodities markets and supporting prices,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “So all the group needs to do now is not oversupply the market.”

The rally in market structure is rippling all the way along the futures curve. U.S. crude for December 2022 was more than $3.50 a barrel more expensive than futures for a year later, the strongest for that gauge since October 2018 on a rolling basis. Still, the pandemic is casting a shadow over the demand picture for the second half of this year.

“The oil market welcomed the OPEC+ decision to stick with its existing production plan, and in conjunction with positive global demand indications, prices are gaining further today,” said Louise Dickson, oil markets analyst at Rystad Energy. “But the demand euphoria is still receiving daily doses of reality as Covid-19 cases are boundlessly spreading in India and other parts of Asia.”

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