The oil market heaved a sigh of relief on Thursday in London following the commencement of COVID-19 vaccine inoculation. Global benchmark futures surged 2.8% to climb above $50 per barrel, reaching a nine-month high.
The gain marks a significant market rebound since the oil industry came under the heavy weight of coronavirus.
Moderna and Pfizer announced the success of their respective vaccines trials, boosting the chance of global economy rebound and accelerating the pace of oil market recovery. The weakened U.S. dollar is also a factor in the oil price increase. Bloomberg said it raised the appeal for commodities priced in this currency and helped thrust Brent past $50.
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Though it is expected that vaccine rollouts would spur the oil market recovery, analysts are surprised it is coming this fast.
“I am a bit surprised that it happened now. I have been advocating $50+ Brent, but I thought that would happen after we see inventories and demand look better,” Bart Melek, the head of global commodity strategy at TD Securities.
Bloomberg reported that key technical indicators are signaling that benchmarks are overbought and U.S. inventories recently are piling higher, which suggest the possibility of the market getting ahead of itself.
Data from Energy Information Administration said U.S. inventories expanded a whopping 15.2 million barrels last week in the biggest build in government data going back to 1982, with the exception of one week in April. At the same time, domestic gasoline demand is the lowest it has been for this time of year since 1997.
The report noted that supply and demand dynamics have drastically improved from just a few months ago. Inventories are drawing down globally, and there are signs the market is handling increased output better than anticipated. But, it will be months before the vaccine is distributed widely enough to fully reopen the economy.
“The distinct FOMO-type shift in financial market sentiment is supported by a global physical market that is absorbing barrels at a more robust-than-consensus pace,” RBC analysts including Helima Croft and Micheal Tran said in a report. “Asia refinery runs remain firm, global floating storage levels are being dismantled at a vigorous pace and European mobility is accelerating amid loosening regional lockdowns.”
Some measures by oil exporters which include keeping a tight rein on output, contributed to the astonishing surge, and there are indicators that it will be sustained in the long term.
The Bloomberg report noted that the swift reshaping along oil’s forward curve underscores the confidence in a long-term recovery. The curve is now trading in a structure known as backwardation that makes it profitable to roll contracts from one month to the next, which is also attracting a rush of new flows to the market.
The signals are notable across continents even amidst the economic pressure stemming from the second wave of COVID-19.
There are glimmers of a recovery in Europe in addition to Asia’s full-throttle return. The U.K., which emerged from a second lockdown this month, saw road fuel sales jump by almost 10% last week. Fuel use in Brazil has surpassed pre-virus levels. Still, it’s a less certain picture in the U.S., where gasoline consumption has dropped to the lowest since May, the report said.
Good and bad news for Nigeria.
Africa’s largest oil producer Nigeria has a tough future to reckon with as the price surges. The largest economy in Africa removed fuel subsidy earlier in the year as she gears toward full deregulation, which means, the Nigerian oil market now sells at international market price.
While the rising oil price will put more money into Nigeria’s government purse and help stabilize naira, the country’s currency, against dollar, it will spark industrial action as the cost will gradually become unaffordable.
In September, Nigerian labor unions were close to embarking on indefinite nationwide strike following an increase in the price of fuel. It was aborted when the negotiations between government and labor unions yielded a deal that includes the exclusion of minimum wage earners from income tax.
Pump price in Nigeria has been moving up and down since the removal of the fuel subsidy. Each time it goes up, uproar follows, signaling that there would be a showdown between Nigerian government and its people when the global economy fully recovers and the oil market bounces back.
Nigeria is facing its worst recession in decades, degenerating its revenue woes, and thus cannot afford to subsidize fuel for now. On the other hand, the larger number of Nigerians living on N30,000 ($80) monthly minimum wage or less, cannot afford to buy fuel at international price.
Against this backdrop, the rising oil price is to Nigeria, a test of economic dichotomy.