The oil rally fueled by the progress of the vaccine comes from Reuters

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© Reuters. FILE PHOTO: In this picture a 3D printed oil pump jack is placed on dollar banknotes

By Devika Krishna Kumar and Stephanie Kelly

NEW YORK (Reuters) – The oil market has risen nearly 40% in the past two months, taking benchmarks to a nine-month high. This is a euphoric response to advances in COVID-19 vaccines, with investors believing the end of the coronavirus pandemic is imminent.

However, reality hit back on Monday with a sell-off sparked by the surge in cases in the UK. Infection rates are lowest in many countries and vaccine distribution is proving slow, meaning cycles of lockdowns and travel restrictions continue and fuel demand remains tepid for many months.

That said, most of the rally is already in the rearview mirror, dealers and brokers said. hit a nine-month high of $ 52.48 a barrel last week but was down as much as 4% on Monday as prices topped $ 49 a barrel before slipping.

“Even when traders see stability, the unexpected can always happen and inflated prices show their glass legs,” said Louise Dickson, oil market analyst at Rystad Energy.

The market has rallied sharply since the spring when a combination of a price war between Saudi Arabia and Russia and a slump in demand due to the coronavirus pandemic brought Brent below $ 20 a barrel and sent US futures into turmoil, with you nadir at negative 40 USD was a barrel.

The rally accelerated in the last two months of the year after several drug manufacturers announced strong responses to vaccine trials, raising hopes that life would return to near pre-pandemic normalcy.

According to analysts, the fundamentals of the energy market remain cautious. The Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) have revised their estimates of oil demand lower for next year, the latter warning that global markets remain fragile.

Oil companies have scaled back their expected investments for the coming year, and several companies have given poor prospects in response to demand. BP (NYSE 🙂 does not see in its forecasts for the coming year that refinery processing in its most optimistic scenario will reach pre-COVID levels for a few years.

The current gasoline refining margin of $ 9.52 a barrel is lower than all but two of the past 10 years for this time of year.

“We see global refining margins as the main fundamental driver of crude oil prices over the next cycle,” said Michael Tran, an analyst at RBC Capital Markets, in a statement last week.

OPEC and its allies agreed this month to reduce supply cuts, which will give the world market more oil. US producers are also increasing supply as energy companies added oil and drilling rigs for the fourth straight week last week.

Monday’s decline could also cause more hedge funds to unload positions after accumulating in bullish bets since early November.

Speculators, including hedge funds and other money managers, have increased net long positions in US crude oil futures and options by more than 25% in the past six weeks. Technical signals suggest that Brent prices were recently overbought.

One ray of hope: the physical qualities have held up worldwide as China continues to make purchases. China’s crude oil throughput rose 3.2% year over year to a daily record in November.

Oil time spreads, an indicator of future market fundamentals, have rebounded, suggesting that supply will even out by early next year. (Graphic: https://tmsnrt.rs/3rjuZZG)

The January-June US crude oil futures spread has narrowed in recent weeks. Currently, January futures are trading at 35 cents under the June futures, compared to $ 2 under the June futures last month. This is a signal that investors now expect inventory levels to decline in the first half of 2021.

For the end of 2021, however, June barrels will be trading almost 80 cents per barrel higher than December barrels. This suggests that oversupply could return by the end of next year, especially as OPEC boosts production.

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