An oil refinery and storage complex near Houston. American Petroleum Institute reported US oil inventories shrank by 5.15 million barrels last week. Image Credit: Reuters

Dubai: Oil extended gains to a fresh two-month high after a report showed a decline in U.S. stockpiles, adding to the bullish momentum after progress toward mass deployment of a coronavirus vaccine lifted optimism on the demand outlook.

Futures in New York rose as much as 2.2%, after jumping 2.7% on Tuesday. The industry-funded American Petroleum Institute reported U.S. oil inventories shrank by 5.15 million barrels last week, according to people familiar. That would mark the second week of reduced stockpiles, if confirmed by official government data later in the week. Gasoline and distillate stocks also declined in another positive sign for consumption.

U.S. crude has joined a broad asset market rally following encouraging results from a large-scale trial of a vaccine being developed by Pfizer Inc. and BioNTech SE, although market analysts remain cautious on the short-term prospects for demand as virus infections continue to surge in the U.S. and Europe.

Vaccine impact on demand

"Once we get the Covid vaccine spread across the globe and it does work as Pfizer has suggested then we would expect to see more normal demand coming through for oil and with that higher prices, but there's still a way to go before all that does happen," said David Lennox, resource analyst at Fat Prophets in Sydney.

Oil demand should recover to pre-pandemic levels by the northern hemisphere's fall season next year, said the head of the world's largest independent oil trader. Vitol Group Chief Executive Officer Russell Hardy predicted 100 million barrels would emerge from storage over the next five months if OPEC and its allies hold off on planned production increases.

In further signs of strength, the spread between West Texas Intermediate's December 2021 contract firmed to its strongest against that for the following December since February, while the Middle Eastern Dubai benchmark was trading in a bullish backwardated structure.

The market also has an eye on the progress of Tropical Storm Eta, which poses a potential threat to offshore oil and natural gas production in the western Gulf of Mexico as it gets ready to make a second landfall on the Florida coast toward the end of the week.

Still, there are reasons to be wary of the latest surge in prices. Goldman Sachs Group Inc. said fresh virus outbreaks will present a speed bump to the oil market before further tightening. Meanwhile, BMO analysts said it is "too soon" for $50 oil prices as the market contends with supply headwinds such as returning Libyan output, though the market could balance in the second half of next year.