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Pfizer and BioNTech announced that their coronavirus vaccine was more than 90% effective in preventing Covid-19 among those without evidence of prior infection. This news triggered the most dazzling rally in the oil market since May. Brent crude and WTI rose by more than 8% amid expectations that people will soon return to their previous lifestyle. In its turn, risk-off sentiment returned to the market thanks to optimism across the market. It facilitated demand for oil. Investors also supported the rally in the oil market. On November 3, the number of the net-short positions on US West Texas Intermediate crude reached record highs. However, after the news about the vaccine appeared, traders hurried to close their shot deals, pushing Brent above the $43.5 level per barrel.
Oil Speculative Net Positions
After Joe Biden has won the presidential election in the United States and the risks of the Blue Wave have declined substantially, market sentiment has improved significantly. Senate Republicans are unlikely to allow Biden to spend $2 trillion. During his election campaign, he announced that he would spend this money to decarbonize the US power sector by 2035 in order to achieve zero carbon emissions by 2050. Besides, the IS government is planning the nationwide vaccination. Apparently, the commodity futures markets are moving from contango, indicating an increase in global supply in the future, to backwardation, which signals a rise in global demand.
The futures contracts on Brent crude for December 2020-2022 jumped by 46 cents at once, although it usually changes by a much smaller amount during the trading session. Investors are revising the medium-term outlook for oil as they are now more optimistic about its prospects. However, in the short-term, Brent and WTI are unlikely to regain footing.
Futures Prices Differential Dynamics
Experts at JP Morgan believe that oil first needs to overcome the current supply-demand imbalance before moving higher over the next year or two. "While there is still a massive glut of oil that will need to be cleared before there can be any meaningful recovery in prices, we believe that the global oil market is tentatively entering an inflection phase. We believe that the two major oil benchmarks, WTI and Brent Crude, will trade at parity at $34 per barrel toward year-end 2020," they said. They also suppose that global demand will not be able to recover to pre-crisis levels before December 2021. At the same time, the re-imposition of quarantine measures in Europe due to the rapid spread of COVID-19 will weigh on oil prices in the short term.
In this regard, analysts also take into account the OPEC+ strategy while forecasting oil prices for the next 1-3 months. Recently, optimism has returned to the oil market amid rumors that the cartel and Russia agreed not to reduce the output volume from 7.7 million b/d to 5.5 million b/d from January 1. However, such speculation was due to fears about the growing number of new coronavirus cases and the possible lockdown. If a vaccine is almost ready, is it worth for countries continuing to lose market share in an attempt to stabilize it? In addition, prices are rising amid high demand.
From the technical point of view, the "Expanding Wedge" pattern is implemented on the daily Brent chart. A break above $41.95 and $42.7 per barrel enabled traders to open long positions. It is recommended to stick to long deals if WTI updates its October high.
Brent daily chart
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