Oil posted the biggest weekly gain since late September as Saudi Arabia’s plan to slice output spurred a surge in physical crude buying.

Futures in New York advanced $3.72 this week and Brent oil topped $55 a barrel for the first time since February. Saudi Arabia’s pledge earlier this week to cut production by 1 million barrels a day in February and March has made for a tighter supply outlook sooner than anticipated. Meanwhile, prospects for additional stimulus under a Biden administration spurred broader market gains.

Saudi Arabia’s surprise cut appears to have caught some Asian buyers by surprise and demand for U.S. crude for export to Asia has gained this week. Unipec, the trading arm of China’s largest refiner, bought its eighth cargo of North Sea crude in a pricing window run by S&P Global Platts this week and was seeking more in what may be the heaviest buying of its kind on record.

“The decision by the Saudis was a big deal and it’s an underpinning for prices,” said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “Clearly, maintaining the oil price was paramount and they were willing to let others take advantage in order to accomplish that.”

Brent’s move above $55 a barrel caps a stellar few months for the oil market, with crude emerging as a favored play to bet on coronavirus vaccines and global reflation. Saudi Arabia’s pledge has led analysts to rethink their projections for crude’s price recovery. Citigroup Inc. boosted its price forecasts on Friday, saying the kingdom’s actions should accelerate stockpile draws.

Meanwhile, annual commodity index rebalancing may provide another tailwind, with as much as $9 billion of oil contracts possibly being bought over the five days of activity that start Friday, Citigroup said.

“It is likely that much of the commodity index buying has been prepositioned for,” so it would not come as a surprise “to see counter-intuitive price action occur next week,” Ryan Fitzmaurice, commodities strategist at Rabobank, said in a note. “But we still expect commodity markets to attract more attention this year even beyond the rebalance as a weak U.S. dollar and increased fears of inflation bring the alternative asset class back in vogue.”

The kingdom’s shock move has rippled across the oil market this week, with the difference between the price of oil for different months firming markedly in recent sessions. WTI’s nearest contract traded at a premium to the following month for the first time since May, while the closely watched spread between the nearest two December contracts is at its strongest intraday level since last January.

There are also bright spots for consumption in spite of the coronavirus as the northern hemisphere faces a freezing winter. Beijing’s coldest weather since 1966 is pushing local energy prices higher and temperatures across much of Europe and Asia are expected to stay below average for most of January.

Source: www.bloomberg.com; Andres Guerra Luz