Oil prices extended their rally to touch eight-month highs on the back of optimistic vaccine trials, an orderly transition in the White House and the possibility of Opec+ extending its current level of output curbs for another three months.
Brent, the international benchmark for more than half of the world’s crude, climbed 1.25 per cent to $48.46 per barrel at 1.15pm UAE time, before later falling to $48.19 by 8.15pm. West Texas Intermediate, which tracks US crude grades, was up 0.8 per cent at $45.27 per barrel.
Markets have been buoyant since a Covid-19 vaccine developed by the Pfizer-BioNTech collaboration proved to be more than 90 per cent effective in clinical trials. Since then, vaccine candidates from pharma companies Moderna and AstraZeneca have also proved efficacy at 90 per cent and 70 per cent respectively during trials.
The coronavirus pandemic, which has infected more than 60 million people and resulted in 1.4 million deaths, has crippled economic growth and demand for oil this year.
WTI plunged to its lowest level on record in April, when it briefly traded at minus $40 per barrel ahead of the expiry of its May contract, as supply outpaced available storage capacity. Demand for energy also fell to a record low in April as countries enforced widespread movement restrictions and shut borders to stem the spread of the pandemic.
"Brent is only around $1.50 per barrel away from hitting $50 per barrel at present while WTI is back up above $45 per barrel,” said Edward Bell, senior director, market economics at Emirates NBD.
"Both benchmarks are benefitting from the broad gain in risk assets, even if a Joe Biden presidency may be less friendly to oil producers,” he said in a note on Wednesday.
Mr Biden’s green economic policies favour a transition away from fossil fuels for the world’s largest producer of hydrocarbons.
The new government in the US is “likely to restrict or halt new leases on federally owned land and waters and seek to make this policy permanent,” S&P said in a note on Monday. The Biden administration is, however, “unlikely” to enforce an immediate moratorium on existing drilling or permits, it said.
A restriction on future drilling will impact the flow of shale, tightening the markets and bolstering prices in the long run.
Oil markets also factored in continued support from Opec+, the alliance led by Saudi Arabia and Russia, which has been undertaking market corrections. The group, which convenes for its annual meeting on December 1, is expected to maintain its current level of production curbs for another three months.
The bloc agreed to a historic deal to draw back 9.7 million bpd at the height of the Covid-19-induced demand crunch. It has since tapered restrictions.
Opec+ is currently cutting 7m bpd from markets and was initially set to further taper cuts at its annual meeting. However, lockdowns in various parts of the world and a second wave of Covid-19 cases globally may extend the current level of cuts until the end of the first quarter of 2021.
“Opec+ is in a pretty good place right now and only have to show a unified front on a month-to-month basis, which should be enough to hold the market in check,” said Stephen Innes, chief global market strategist at Axi.
"The challenge that might be confronting the Opec+ producers is one that is all too familiar with central banks worldwide: how to avoid the quota taper tantrum without spooking the market,” he added.
