Oil Jumps to Three-Month High as Cold Snap Tightens Inventories

(Bloomberg) — Oil rose to a three-month high after another contraction in US crude stockpiles, driven by frigid winter weather, reflected a tighter global market. 

Brent futures advanced as much as 2.3%, surpassing $78 a barrel for the first time since mid-October. Crude inventories at the American storage hub in Cushing, Oklahoma, have dropped to the lowest level since 2014, government data showed on Wednesday. 

Traders are also wary of further sanctions on key exporters, with flows from Russia and Iran to Asia under strain recently. Market metrics also point to tighter fundamentals. 

Brent’s prompt spread — the difference between its two nearest contracts – has widened to 78 cents a barrel in backwardation, a bullish pattern. A month ago, the premium stood at 29 cents.

“All one needs to do when assessing the current state of the oil market is to look at assorted spreads,” said Tamas Varga, an analyst at brokers PVM Oil Associates Ltd. in London. “They imply genuine physical tightness, and derivative traders are not afraid to react, notwithstanding the rather comfortable medium-term oil balance.”

Oil’s push higher in recent weeks has been supported by cold weather that’s boosted demand for heating fuels, the drawdown in US inventories, and lower shipments from Russia. President-elect Donald Trump’s imminent return to the White House is also raising risks to Iranian supplies, and creating nervousness about a potential trade war that could interrupt flows of energy.

Trump is expected to authorize new drilling on federal lands as part of a flurry of executive orders in the early hours after his Jan. 20 inauguration. The president-elect has also pledged to put tariffs on all Canadian imports, potentially including crude. 

Nonetheless, many analysts are skeptical that crude can push higher. JPMorgan Chase & Co. expects prices will remain near current levels throughout the rest of the year. Bank of America Corp. predicts that Brent will drop to $65 a barrel. Consumer inflation in China has fallen further toward zero, highlighting the challenge authorities face to bolster the economy.

“Oil’s been supported by weather for the most part,” Francisco Blanch, head of commodities and derivatives research at Bank of America Corp, said in an interview with Bloomberg television. Still, “we do think that the market is in surplus — we have more barrels of oil coming than the market wants to buy — because at the end of the day we’re still in a very frail macro outlook, a frail industrial outlook over the next few months.”

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