Oil dropped as a broader market decline and mounting lockdowns in Europe blunted the potential impact of crude cargoes backing up outside the blocked Suez Canal.
Futures fell as much as 6.1% in New York on Thursday in the wake of declining equities and a stronger U.S. dollar, which reduces the appeal of commodities priced in the currency. Meanwhile, work to re-float the massive ship that’s stuck in the canal — a key trade route for crude flows — continued without success on Thursday in Egypt.
A recent increase in coronavirus cases is also curbing demand. The U.S. reported the most new cases on Wednesday since Feb. 12, while European countries have tightened restrictions recently. Volatility has risen to the highest since November, and traders see the market shedding length with little to stoke immediate optimism ahead of a full-fledged economic reopening from the pandemic.
“Equities are down, people are concerned about the broader picture in the global economy and oil prices had already gone a long way,” said Peter McNally, global head for industrials, materials and energy at Third Bridge. “There’s pent up demand for travel, whether it be air or road. That is still coming. But in the near-term there’s a few hurdles we need to clear before we get to that point.”
Despite the recent sell-off, oil is still up nearly 20% this year and there is confidence in the longer-term outlook for demand as coronavirus vaccinations accelerate worldwide and OPEC+ continues to hold back supply. The alliance is scheduled to meet next week to decide production policy for May.
“It all got a bit too excited earlier with talk about supercycles and massive stock draws in the first quarter,” said Paul Horsnell, head of commodities research at Standard Chartered. That was “never on the cards, the big stock draws come later.”
Hedge funds had built up net long positions in WTI and Brent last month to the highest in over a year, according to a Bloomberg analysis of Commodities Futures Trade Commission and ICE data for four contracts. Since then, prices jumped to multi-year highs and above technical gauges indicating a correction was due, before last week’s price plunge sent futures in New York back near $60 a barrel.
The prompt timespread for Brent has resumed trading in a bullish backwardation after briefly flipping to a bearish contango on Tuesday for the first time since January. The spread was more than 10 cents in backwardation on Thursday, compared with 67 cents at the start of the month.
Tugs and diggers have so far failed to dislodge the container ship in the Suez Canal, which has led to a gridlock of vessels waiting to pass. Some experts say the crisis could drag on for several days.
The spring tide on Sunday or Monday will add extra depth and allow for more maneuvering, said Nick Sloane, the salvage master responsible for refloating the Costa Concordia.
Source: Newmax
