Oil’s swift rout triggers the biggest weekly loss since October

Oil, one of the most-favored reflation trades, just took a heavy beating. Prices headed for the biggest weekly slump since October after a sell-off driven by inflation concerns and a cooling physical market.

Futures in New York clawed back some of the losses on Friday, but the recovery was muted given Thursday’s 7.1% decline. The drop followed a surge in Treasury yields that pushed the dollar higher, while there were signs of softer near-term crude demand in Asia. The unwinding of long positions by some commodity trading advisers may also have played a role.

“Don’t mistake a correction for a derailment,” JPMorgan Chase & Co. analyst Natasha Kaneva wrote in a note to clients. “The price move was likely accentuated by a washout of investor length which has been steadily rising since late last year.”

Despite the abrupt setback, prices are still up more than 20 per cent this year on prospects for a recovery from the coronavirus pandemic. That climb has been helped by the surprise decision by the Organization of Petroleum Exporting Countries and its allies to extend supply curbs. Oil’s rapid gains of early March may have set the scene for this week’s pullback, though banks including Goldman Sachs Group Inc. remain bullish on the outlook.

The sell-off will prove to be “transient” and this week’s decline presents a buying opportunity amid the large rally, Goldman analyst Damien Courvalin said in a note. There’ll still be a swift rebalancing of the market, with vaccinations driving an increase in mobility, he said. UBS Group AG also stuck with its positive outlook for Brent.

Prices

  • West Texas Intermediate for April rose 0.7% to $60.41 a barrel as of 11:04 a.m. London time
  • Most-active prices have lost 7.9% this week
  • Brent for May advanced 0.5% to $63.60 a barrel

The recent price weakness had been telegraphed by a slump in the market’s structure. WTI’s prompt timespread is nine cents in contango, a bearish pattern where near-term prices trade below those further out. And while Brent is still backwardated – a bullish formation – it’s down to 17 cents a barrel from more than twice that a week ago.

That weakness is mirrored in feeble physical market demand, particularly in Asia, while Europe’s vaccine rollout remains sluggish – another headwind for the recovery in consumption.

Still, data from the U.S. suggest that the latest bout of fiscal stimulus may help to spur travel there, while a dozen states are expanding access to COVID-19 vaccinations earlier than planned.

“The current price level should prove a good basis for recovering prices,” said Commerzbank AG analyst Carsten Fritsch. “After all, the oil market is still tight.”

© 2021 Bloomberg L.P.

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