Oil highest since March on vaccine progress, Biden transition

Oil traded at its highest level since March as markets broadly rallied on the start of the US presidential transition process and with the demand outlook strengthening after a string of positive vaccine breakthroughs.

Brent futures rose as much as 1.4% in London, accompanied by a sharp rally in the shape of the futures curve as physical markets in Asia showed signs of strength. The triggering of a formal transition process to US President-elect Joe Biden buoyed stock markets and pushed down the dollar on Tuesday.

With coronavirus vaccines appearing more likely in recent weeks and crude demand in Asia soaring, the gains in the shape of the oil futures curve have been even more stellar than the almost 24% rise in Brent prices so far this month. The international benchmark’s nearest contract moved to a premium to the next month on Monday for the first time since July -- a bullish structure known as backwardation that indicates tight supply.

Such is the strength of the recovery in Asia, it’s now pulling supplies from as far afield as the North Sea. A rebound in Chinese local flights is also aiding demand for jet fuel, the hardest-hit oil product. That broad recovery has helped drive the market’s return to backwardation, which is significant as it often attracts passive flows into the market, leading to further price rallies.

“There are a growing number of unequivocal signs that the developing positive confidence will keep growing,” said PVM Oil Associates analyst Tamas Varga. “The improvement in Brent spreads is also down to healthy demand from the Far East.”

WTI’s discount to Brent has widened sharply in recent days amid expectations for OPEC+ to extend current output cuts into next year. Some members of the group are showing signs of strain, however. Iraq is seeking upfront payments of about $2 billion in exchange for a long-term crude-supply contract, the latest sign of Baghdad’s growing desperation for cash.

Saudi Arabia, meanwhile, confirmed that Houthi rebels in Yemen targeted an oil facility in northern Jeddah province, a reminder of the ever-present risk of instability in the region. The attack on Monday caused a fire at an oil tank inside a fuel-distribution center, the kingdom’s energy ministry said.