Oil unlikely to remain bearish for long after worst weekly slump in a year

Crude benchmarks fall by 7% amid concerns over inflation and a rise in US crude inventories

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo

Oil prices are unlikely to remain bearish for long, as fundamentals in crude markets will adjust in the near future, analysts say.

Crude suffered its worst day since April 2020 on Thursday as Brent, the most-widely traded benchmark, fell 7 per cent, although it remains about 25 per cent higher since the start of this year.

Brent recovered some lost ground on Friday, settling up 1.98 per cent at $64.53 per barrel. The US benchmark, West Texas Intermediate, gained 2.37 per cent to close the week at $61.42 per barrel.

Both benchmarks had plummeted amid concerns over inflation and a rise in US crude stocks. Before the dramatic weekly decline, Brent and WTI had doubled in value from their low point in March last year.

"More than likely, now that a culling of the herd has happened, oil's bullish underlying case will reassert itself, and I do not expect prices to remain down here for very long," said Jeffrey Halley, Asia Pacific senior market analyst at Oanda.

Oil's decline last week has raised questions about a the emergence of a new commodity supercycle.

Crude, alongside metals such as copper and gold have rallied in recent months, after widespread vaccination drives in developed economies and massive stimulus measures to support the global economy.

However, concerns about the safety of the Oxford-AstraZeneca vaccine in Europe, as well as the slow pace of inoculation across the continent amid surging Covid-19 cases, has revived concerns about demand recovery.

"The drop in crude prices this week was in our view not caused by one factor but a combination of them," said Giovanni Staunovo, commodity strategist at UBS.

The "build-up in US crude and oil product inventories" last week and cold weather in southern states of the country both affected prices, as was refinery maintenance in China, the world's biggest importer of crude, UBS said in a report.

Demand from China is expected to recover once the maintenance period is over.

However, Europe remains the biggest cause of concern for oil markets, the Swiss bank said.

"Oil demand recovery is stalling as governments have extended mobility restrictions," Mr Staunovo said.

"That said, the faster vaccination pace in the UK and the US is promising; road activity in both countries and flight activity in the US are already improving."

UBS is optimistic about Brent's recovery, estimating the benchmark will average $75 per barrel in the second half of the year, supported by continued supply restrictions from Opec+.

The group, led by Saudi Arabia and Russia, is keeping a tight lid on output, drawing back 7.2 million barrels per day from the beginning of the year until April. Saudi Arabia is also contributing an outsize cut of 1 million bpd until the end of next month.

However, the increase in crude inventories last week – for the fifth week in succession – also played its part in Thursday's sudden slump.

"Concerns are that Americans have started to pump oil at a level which could unbalance the supply and demand equation for oil," said Naeem Aslam, chief markets analyst at Avatrade.

Thursday's plunge "got the oil bulls out of the dream of seeing the price of a barrel at $100," said Ipek Ozkardeskaya, senior analyst at Swissquote.

"Right now, we are perhaps at a point in time and at a level in price where the bulls start asking how far they should carry the oil rally," she added.

The price range of $65 to $68 will be a "make-or-break zone" for the foreseeable future, with the price of oil likely to soar and consolidate between $75 and $100, she said.