International Energy Agency lowered its demand estimate for this quarter by 600,000 barrels a day in its monthly report. Image Credit: Supplied

Singapore: Oil extended gains in Asia on expectations US President-elect Joe Biden's incoming administration will take steps to revive growth and energy demand in the world's largest economy.

Futures in New York rose past $53 a barrel after closing up 1.2 per cent on Tuesday. Treasury Secretary nominee Janet Yellen called on lawmakers to "act big" on stimulus, which could provide a boost to consumption while coronavirus vaccines continue to be rolled out. A weaker US dollar is also increasing the appeal for commodities like oil that are priced in the currency.

The optimism was tempered somewhat as the International Energy Agency cut forecasts for global oil demand as renewed lockdowns to contain the pandemic weigh on consumption. The Paris-based agency lowered its demand estimate for this quarter by 600,000 barrels a day in its monthly report.

Gloomier outlook

The IEA's gloomier outlook is a validation of Saudi Arabia's decision earlier this month to unilaterally cut production in February and March. That's helped oil to keep rallying this year, along with a weak dollar and fund flows into commodities as a hedge against a likely acceleration in inflation this year.

"Investors are pricing in a very chunky stimulus" in the U.S. that should weaken the dollar, which would be good for oil, said Stephen Innes, chief global market strategist at Axi. "OPEC+'s current supply discipline coalescing with the Biden administration's overarching focus on public health and economic response to the Covid-19 pandemic suggests oil prices can go much higher."

The near-term trajectory of oil's demand recovery has lost some momentum, however. The Chinese government is calling for citizens not to travel over the Lunar New Year holidays, while much of Japan is under a state of emergency and several European nations are still locked down.

For 2021 as a whole, the IEA trimmed its demand forecast by 300,000 barrels a day. Global fuel consumption will increase by 5.5 million barrels a day this year, following an unprecedented collapse of 8.8 million a day in 2020, it said.

The oil future curve is reflecting expectations for supplies to tighten. Brent's prompt timespread is 7 cents a barrel in backwardation, a bullish structure where near-dated prices are more expensive than later-dated ones. It was 7 cents in contango in early January.