The oil markets have staged a dramatic rally since early November, with WTI breaking out of a range between the high $30’s and low $40’s for the first time since early this year. In this article, we will take a look at a couple of key drivers for this breakout, and see if it will continue on into the New Year.

What caused the rally?

Fundamentals for crude oil have been gradually improving over the last 6-months. The massive 550 mm supply overhang from early January has been gradually whittled down to just above 475 mm bbls. Now, that may sound like a lot but bear in mind that we go through about 18 mm barrels of oil per day, and with a consumption rate like that, 475 mm bbls accounts for just 26 days of supply. The difference between feast and famine is not always as big as one might think. If you can get all the oil you want, you are feasting. If there is a worry that some of your needs might go unmet, famine mentality sets in. One of the outcomes of this inventory drawdown is a perception of tightening in the futures market for oil, with the later contracts moving into backwardation. Backwardation is a situation in which the current contracted price for a commodity is higher than prices in future months, and expresses short term supply concerns that drive prices higher. This is a positive sign for the market.

Click here to read the full article.