Oil edged lower after capping the longest run of gains in two years, as the IEA cautioned that the recovery in the market is still fragile.
Futures in New York have surged more than 12 per cent over the past eight sessions as crude stages a robust rebound from the depths of the COVID-19 pandemic amid a tightening market. The rapid gain has driven prices to the highest level in a year, but also pushed crude’s 14-day relative strength index to its most overbought level in more than 20 years, signaling a correction is due.
But there have been mixed views on the health of the market in recent days. The International Energy Agency cut its estimates for consumption this year and said last year was also weaker than previously thought. Still, Citigroup Inc. predicted the global benchmark Brent will reach $70/bbl by the end of the year while JPMorgan Chase & Co. called a new supercycle or commodities.
Oil’s rebound accelerated after Saudi Arabia pledged to deepen output cuts and as prompt timespreads firmed in a bullish backwardation structure, helping to unwind global stockpiles built up during the outbreak. There are still concerns that the virus may curb near-term fuel demand, with China’s air traffic falling sharply ahead of the Lunar New Year holiday after a resurgence in some areas.
“A small pullback would make sense, not least considering the continued cautionary tone from the IEA,” said Ole Hansen, head of commodities research at Saxo Bank. “Question is whether Brent will find enough correction strength to move back below $60.”
- West Texas Intermediate for March delivery lost 0.6 per cent to $58.35/bbl at 10:30 a.m. London time
- Brent for April settlement fell 0.6 per cent to $61.08
While the IEA cautioned over the market’s health in the short-term, it also said the outlook for the second half of the year is brighter. Swollen oil inventories will then decline sharply as fuel use picks up.
“We’re seeing that the outlook for the economy and oil demand in 2021 is looking brighter, despite the near-term weakness because of coronavirus,” Toril Bosoni, head of the oil market division at the IEA said in a Bloomberg TV interview. “We still have to reduce the overhang on the product stocks that built up.”
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