Oil, one of the most-favored reflation trades, just took a heavy beating. Prices headed for the biggest weekly slump since October after a sell-off driven by concerns that recent gains had been too rapid given mixed signals about near-term demand and a rising dollar.
Futures in New York extended after a five-day slide that culminated in a 7.2% plunge on Thursday. Prices have been hurt by a surge in Treasury yields that pushed the dollar higher, signs of softer near-term demand in Asia, and a gain in US stockpiles.
The unwinding of long positions by some commodity trading advisors may also have played a role, as well as technical signals.
“The futures market in recent weeks has got a bit ahead of itself, particularly when you compare it to the physical market, which has shown signs of weakness,” said Warren Patterson, head of commodities strategy for ING Group. “I still hold a constructive view for the market in the medium term. However, in the near term I believe that upside is limited.”
While oil’s run of losses meant the world’s most important commodity has suffered an abrupt setback, prices remain more than 20% higher in 2021 on prospects for a recovery from the pandemic. The year-to-date climb has been underpinned by the surprise decision earlier this month by the Organization of Petroleum Exporting Countries and its allies to extend supply curbs.
Oil’s gains in early March may have been too rapid, setting the scene for the pullback, but bank’s including Goldman Sachs Group Inc. remain bullish on the outlook.
The sell-off will prove to be “transient” and the pullback presents a buying opportunity amid a large rally, Goldman analysts including Damien Courvalin said in a note. There will still be a rapid rebalancing of the market, with vaccinations driving an increase in mobility, they said.
- WTI for April was 1.2% lower at $59.28 a barrel on the New York Mercantile Exchange at 2:18 p.m. in Singapore.
- Most-active prices have lost 9.8% this week.
- Brent for May lost 1.5% to $62.26 a barrel on the ICE Futures Europe exchange.
Data from the US suggest that the latest bout of fiscal stimulus may help to spur increased travel across the world’s largest economy. In addition, a dozen states are expanding access to Covid-19 vaccinations earlier than planned for every adult, accelerating the biggest such campaign in the country’s history.
In Europe, the European Union’s drugs regulator endorsed AstraZeneca Plc’s Covid-19 vaccine after concerns about its safety, enabling the bloc to put vaccinations back on track. That’s urgent given the rising pace of EU-wide cases and a renewed four-week lockdown in parts of France.
However, warning signs remain. WTI’s prompt timespread is 10 cents in contango, a bearish pattern where near-term prices trade below those further out. And while Brent is still backwardated, a bullish structure, it’s down to 22 cents a barrel from more than twice that a week ago.
Given vaccination roll-outs, the case for rising consumption remains strong, although investors needed further proof, according to Victor Shum, vice president of energy consulting at IHS Markit. “If the demand spike does not materialize and production goes up, prices will fall,” he warned.