WTI melt-up continues, $58.00 now in sight

The crude oil melt-up that started at the beginning of the month has continued into a sixth day; since 1 February, WTI has surged from lows beneath $52.00 to current levels just shy of the $58.00 mark, a more than 11.5% rally from last week’s lows. On Monday, the front-month WTI futures contract is having a good look at the $58.00 level and, technically speaking, there is very little reason why it cannot take this level as there is not much resistance ahead of the $60.00 mark.

Driving the melt-up

Driving the gains over the past week has been a combination of factors including 1) ongoing flexibility and strong supply cut compliance from OPEC+ oil producers and, more specifically, voluntary output cuts from Saudi Arabia, 2) optimism that vaccines will unlock the global economy later in the year, thus boosting demand, 3) optimism about falling Covid-19 cases in the US, Europe and a mini-outbreak being brought back under control in China and 4) bets that the US Congress is going to deliver on further fiscal stimulus in a big way.

More specifically on Monday, the above-mentioned factors are all still relevant, but crude oil markets are also being driven by a broader reflation trade; US 10-year break-evens (calculated by subtracting the real US 10-year bond yield from the nominal US 10-year bond yield) moved above 2.20% for the first time since 2014. Assets that benefit from higher inflation expectations have all received a boost, such as commodities, which have been boosted across the board. In other words, expectations for higher inflation going forward seems to be one of the key factors driving gains in the crude oil complex on Monday.

Elsewhere, geopolitics have also likely been supportive; US President Joe Biden said over the weekend that he would not be lifting sanctions from Iran before the country returned to its commitments under the JCPOA agreement. The situation has turned into something of a standoff, with Iran steadfast that they refuse to return to their commitments under the deal until the US lifts economic sanctions. The longer the standoff drags on, the better for crude oil, as it means more Iranian oil prevented from entering global markets.

Vaccine concerns shrugged off, for now

Bad news regarding the efficacy of the AstraZeneca vaccine versus the South African variant of Covid-19 has not had an impact on broader market sentiment nor crude oil markets just yet but does pose a risk; South Africa paused the rollout of the AstraZeneca vaccine after a trail of around 2000 people with an average age of 31 were found to only have been given very minimal protection by the vaccine against mild-moderate illness caused by the South African variant of Covid-19.

However, the chief of the trial, Professor Shabir Madhi, said that the trial did not show how well the vaccine would protect against severe disease given that the average age of the participants put them outside of the most at-risk group. Given the similarity of the vaccine to the Johnson and Johnson vaccine, which was recently found to be highly effective in preventing severe disease in South Africa, Madhi still hopes that the AstraZeneca vaccine will be effective in preventing serious illness.

Any downside surprises with regards to vaccine efficacy represent a downside risk to risk assets such as crude oil.