Oil Snaps Eight-Day Rally After Cut in Global Demand Outlook
(Bloomberg) -- Oil capped its longest winning streak in two years following the International Energy Agency’s bleaker outlook for global demand and signs that futures were overbought.
Prices in New York slid 0.8% on Thursday, the biggest decline in two weeks, after rising for eight straight sessions. The IEA said the re-balancing of the global oil markets remains “fragile” and slashed its forecasts for world oil consumption in 2021 as the pandemic continues to limit travel and economic activity. Still, the agency said the market’s prospects look stronger in the second half of the year, and swollen oil inventories will drop sharply as fuel use picks up.
“Crude has shown some really strong gains,” said Gary Cunningham, director at Stamford, Connecticut-based Tradition Energy. But “there’s some questions as to whether or not these levels can be maintained” amid uncertainty over the demand recovery and the ability for producers to limit supplies.
While crude is up more than 11% this month, the recent stretch of price gains had pushed its 14-day Relative Strength Index this week to the most overbought level since 1999, signaling the rally was due for a correction. But the underlying setup for oil remains firm. Citigroup Inc. predicted the global benchmark Brent will likely reach $70 a barrel by the end of the year, while JPMorgan Chase & Co. called a new supercycle for commodities.
Oil’s rebound accelerated after Saudi Arabia pledged to deepen output cuts and the premium on the nearest contract 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.
“It’s an ideal time for profit-taking” following the recent streak of price gains, said Edward Moya, senior market analyst at Oanda Corp. Yet, “there’s optimism that a lot of Americans are going to get vaccinated in these next couple months, which means they’re going to be more willing to travel.”
Along with the IEA’s expectation for a brighter second half of the year, OPEC also said demand for its crude will be higher than previously expected, on a weaker outlook for rival supply and stronger global consumption in the second half.
“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 Television interview. “We still have to reduce the overhang on the product stocks that built up.”
Meanwhile, the recent rise in oil prices is draining oil storage locations across the Americas. With the market in backwardation, storage has become unprofitable, and U.S. Gulf Coast terminal operators are now offering to lease tanks at less than half the rate at the height of the storage boom last year.
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