Oil Prices Forge Ahead Despite Trader Concerns
(Bloomberg) -- Oil in London rose above $60 a barrel for the first time in more than a year in a rally that’s dividing the world’s top oil trading houses.
Global benchmark Brent futures surged 2.1% on Monday. Surpassing the key marker is another milestone in a stellar comeback from the depths of the pandemic, which forced countries to lock down and devastated economies. Trading house Trafigura Group sees prices moving even higher as refiners increase processing rates to meet rising product demand amid tight physical crude supplies.
However, with a full-fledged demand recovery yet to take shape, futures may have rallied too far too fast, especially with key technical indicators signaling crude is in overbought territory. The world’s largest independent oil trader, Vitol SA, and rival Gunvor Group Ltd. both expressed caution over the recent rally.
“Be concerned all you want, but oil prices continue to rip,” said Bob Yawger, head of the futures division at Mizuho Securities. “There are some good demand-side factors and some good supply-side factors, which are all conspiring to push prices higher. But they could trade lower fast at any given moment.”
Helping buttress oil’s recovery has been a historical production cut agreement by OPEC+: Global stockpiles in onshore tanks and floating storage are estimated by the International Energy Agency to have shrunk by about 300 million barrels since the group made deep reductions in May. Meanwhile, reduced supply and a Covid-19 vaccine-driven demand boost have entrenched the oil futures price curve in a bullish backwardation structure, which encourages more draining of oil tanks.
China has been a key driver of the market rebound. The number of tankers sailing toward the nation jumped to a six-month high on Friday. Royal Dutch Shell Plc Chief Executive Officer Ben van Beurden said last week that fuel sales in China are back into “significant growth mode.” Meanwhile, Indian demand is almost back to year-ago levels as consumption of cooking fuels and gasoline surged on the back of forced lifestyle changes due to the virus.
Saudi Arabia’s production cut “gives people a lot more confidence in OPEC+’s ability to manage supply,” said Peter McNally, global head for industrials, materials and energy at Third Bridge. “OECD inventories have been drawing, and it looks like they’re going to continue to head lower with OPEC steering the ship.”
- Brent for April rose $1.22 to settle at $60.56 a barrel
- West Texas Intermediate for March delivery gained $1.12 to $57.97 a barrel
- Both benchmarks are at the highest level since late January 2020
- A weaker U.S. dollar on Monday also boosted the appeal of commodities priced in the currency
Aside from WTI and Brent’s 14 Day Relative Strength Index’s hovering above the 70 level, pointing to oil being overbought, other technicals also suggest a correction is in store for crude’s red-hot rally. Both benchmarks settled above their upper Bollinger bands on Monday, a signal to some investors that prices may be due for a pullback.
All the while, a rebound in fuel demand remains elusive, with a further slowdown in San Francisco traffic in January serving as the latest sign of the hobbling recovery.
The market is “getting ahead of itself in terms of a post-vaccine euphoria,” Mike Muller, the head of Vitol’s Asian operations, said Sunday in an interview with Dubai-based consultant Gulf Intelligence. Gains beyond $60 a barrel are unlikely because that would prompt energy companies to ramp up production, Gunvor Chief Executive Officer Torbjorn Tornqvist said on Friday.
Other oil market news
- Crude’s surge up to $60 a barrel has propelled it into the biggest layer of options holdings in the market.
- Iran said it knew nothing about a cargo of oil that the U.S. is trying to seize and which Washington claims was exported covertly by the Islamic Republic.
- The head of Libya’s new presidency council is due soon in the capital to begin work on a transitional government amid cautious hopes a decade of fighting that’s divided the OPEC nation may be coming to an end.
© 2021 Bloomberg L.P.
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