Oil slips in fragile rally as market struggles for direction
Oil edged lower in Asian trading as the market struggled for direction amid mixed signals for demand following a recent rally to levels last seen before the worst of the Covid-19 pandemic.
Futures in New York are poised for a modest weekly loss after a volatile week that saw prices briefly hit the highest level in more than two years. Near-term signs are pointing to rising fuel consumption from America to the UK, while a huge US stimulus package lifted sentiment. OPEC, however, sounded a note of caution in the outlook, trimming its estimates for the amount of crude it will need to pump over the next two quarters.
“The latest rally is starting to feel fragile,” said Vandana Hari, founder of Vanda Insights in Singapore. “Once sentiment from the US stimulus moves into the rearview mirror, we could return to inflation worries and skittish financial markets. That casts a bearish shadow on the oil complex.”
Oil has rallied more than 35% this year as the market tightens due to output cuts from OPEC+ members and as the rollout of vaccines spurs optimism over the demand outlook. Sustained higher prices, however, might encourage a surge in US production by shale drillers in a move that would add to supply concerns amid sharply-rising flows of Iranian crude into China.
The availability of crude cargoes, meanwhile, remains tight due to the OPEC+ curbs. Some oil processors in Asia will get less crude than they asked for next month from Saudi Arabia as the producer extends its unilateral output cuts. Three refiners will receive almost 20% less supply than requested.
The prompt timespread for Brent was 64 cents a barrel in backwardation -- a bullish market structure where near-dated prices are more expensive than later-dated ones -- compared with 68 cents a week earlier.
Following the updated outlook from OPEC, all eyes will be on a report from the International Energy Agency next week, which will publish oil production data for February and forward-looking demand forecasts. The market will also be watching for clues on the health of the US-China relationship with a high-level meeting set for March 18-19 in Alaska.