Oil prices continue their rally amid positive vaccine news
Oil prices were rising again Tuesday, continuing the momentum from their Monday surge on positive vaccine news. Brent crude futures, the international benchmark, rose 2.2% to $43.33. West Texas Intermediate futures rose 2.2% to $41.17. They had risen 7% and 8%, respectively, on Monday. Oil stocks were up too, with producers seeing particularly large gains, Barron's writes in the article Oil Prices Continue Their Rally. And Market Watchers Think There’s Room to Run.
“Although it will take time, several months, to actually apply this vaccine globally—and that’s only if it gets the relevant approval—the enthusiasm is too grand to brush away in the course of a day,” wrote Bjørnar Tonhaugen, head of oil markets at Rystad Energy. Energy outperformed every other sector in the S&P 500 on Monday after months of underperformance. And it wasn’t even close. The Energy Select Sector SPDR ETF (XLE) rose 14% The second best performer was financials with a gain of 8%.
Some analysts think that oil prices may stay elevated in coming weeks despite all sorts of continuing challenges. (Of course, elevated is a relative term when oil is still around $40, a price where most U.S. companies barely break even.) Monday’s rise was propelled by short-covering, as short-sellers were forced to buy oil stocks to cover their negative bets. Traders have placed a larger number of short bets on energy stocks than usual. Those bets have paid off for months as oil prices and stocks fell. But heavy short interest can also lead to strong rebounds. And given Monday’s move, it seems less likely that traders will want to place short bets on oil in the near future.
“The positive vaccine news is likely to make investors think twice before pressing short positions further,” wrote RBC Capital Markets analyst Michael Tran. “We believe that the calculated de-risking of previously undefined COVID outcomes will led to a firm floor for the oil market until the pace of the demand side green shoots can be quantified.”
Goldman Sachs analyst Damien Courvalin believes that the resurgence of Covid-19 in Europe and the U.S. will hurt oil demand by as much as 3.1 million barrels per day, but it won’t stop oil prices from rebounding over the next 18 months as vaccines emerge. Goldman thinks Brent prices will rise to $65 in early 2022, after previously projecting that they’d get to that price in the fall of 2021. “Importantly, this is only a speed bump in our forecast of a sharp tightening of oil fundamentals through 2021, driven by a recovery in demand boosted by vaccines and rapid testing as well as by the collapse in upstream investment and change in the shale reaction function,” he wrote. “We expect the winter COVID wave to delay but not derail the oil market rebalancing.”
Whether oil stays above $40 in the near term may depend on what OPEC decides next week about curtailing future production.