Oil drops after rallying on signs of rising global fuel demand

The coronavirus is still looming over the market, however, with a resurgence in regions such as India and Brazil clouding the near-term outlook. OPEC+ warned earlier in the week that the flare-up could even derail the recovery.

Oil declined on Friday, but prices are still heading for a weekly gain as signs of strengthening demand from the US to China stoked optimism the recovery from the pandemic is accelerating.

General view of Neste's oil refinery(Reuters File Photo)

Futures in New York dropped 0.6% after closing above $65 a barrel on Thursday for the first time since mid-March. Major American cities are moving to fully reopen, travel across China over an extended holiday that starts Saturday is expected to hit a record, and sales of transport fuels in the U.K. are rising. Big oil companies are also starting to reap the rewards of the recovery.

The coronavirus is still looming over the market, however, with a resurgence in regions such as India and Brazil clouding the near-term outlook. OPEC+ warned earlier in the week that the flare-up could even derail the recovery.

“This week saw an avalanche of strong data and reassuring developments in the U.S, but that may have buried the rising global risk of more transmissible Covid variants, particularly the one that has wreaked havoc in India,” said Vandana Hari, the founder of energy consultant Vanda Insights in Singapore. “At six-week highs, crude was ripe for a breather.”

There’s been a raft of bullish calls on the outlook this week, with the OPEC+ coalition raising its consumption estimates for this year and Goldman Sachs Group Inc. predicting oil demand will post a record jump as vaccination rates increase. While some regions tackle a virus resurgence, the market is also facing additional supply next month as OPEC and its allies boost output.

The short-term risks to the demand outlook are starting to show up in gauges of market health. The structure of the Middle Eastern Dubai benchmark flipped to a slight contango on Thursday, an indication that market tightness may be easing. The backwardation in the prompt timespread for Brent crude has also narrowed this week to 51 cents a barrel.

Still, commodities across the board including copper have rallied in recent sessions, driven by optimism on the recovery in key economies and tightening supplies of raw materials. That’s pushed the Bloomberg Spot Commodity Index to the highest level since 2012 this week.

Europe’s largest oil and gas companies saw their combined cash flow climb to the highest since late 2019 in first-quarter earnings. Some US producers are also restoring dividends as they rebound from the virus-driven crash.