Oil Ends Down 6% As Demand Worries Usurp Market

(Updates prices to settlement)

By Barani Krishnan

Investing.com - The nightmare for oil bulls may have started.

The invincible rally in crude prices,  which lasted for months until it diverged sharply with last week’s 7% fall, doesn’t seem to be returning right away. In its place has come a tendency for market participants to be more circumspect with data and to ask harder questions about demand.

Such a reflex barely existed between the end of October and mid-March as the hype over OPEC+ production cuts glossed over any imperfections in oil demand forecasts. 

But with Europe’s growing pandemic curbs and excruciatingly slow rollout of Covid-19 vaccines, focus has fallen squarely on how the fallout might impact not just barrels consumed by refineries and end-consumers on the bloc but also global projections.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, was awash in red from the beginning of Wednesday’s session in Asia through to the start of trading in New York.

WTI’s front-month settled down $3.80, or 6.2%, at $57.76 per barrel. It earlier hit a six-week low of $57.34. 

London-traded Brent, the global benchmark for crude, settled down $3.83, or 5.9%, at $60.79. Brent came just about 50 cents from breaking its key $50 support when it hit a six-week low of $60.51.

Tuesday's slump marked a renewed downside for the two benchmarks, after Thursday’s 7% dive.

Last week's plunge came after WTI rose from a little under $36 per barrel on Oct. 30 to just under $68 by March 8. Brent, meanwhile, went from under $38 to just above $71 in that same stretch.

“After four months of strong gains, oil has hit a wall,” said Sophie Griffiths, markets analyst at OANDA. 

“While countries are set to reopen economies in the coming months, the oil rally might have gotten ahead of itself. Any rise in demand from here is likely to be matched by rising supply as OPEC+ is set to ease production cuts and U.S. shale output ramps up.”

Pandemic fears in Europe hit new highs this week after the infection rate in Germany, Europe’s largest economy, rose to above 100 per 100,000 inhabitants. That prompted German Chancellor Angela Merkel to keep in place Covid-19 restrictions until April 18. 

Covid-19 infections in neighboring Poland are also more than three times higher to Germany’s, while Italy — Europe’s No. 1 hotspot for the virus during last year’s outbreak — was girding for a nationwide lockdown during the Easter weekend from April 3 through April 5.

Before last week’s plunge, crude prices had risen driven by OPEC+ production cuts, the promise of economic reopening from Covid-19 closures and a blockbuster U.S. pandemic relief that was underway. 

But virtually overlooked in that time was the anemic demand for jet and other transportation fuels as global travel remained heavily curtailed by the pandemic. Europe’s constant struggle with new outbreaks of infections; its alarmingly slow pace of vaccinations; and fresh lockdowns on the bloc were also treated with little seriousness.

On Thursday, however, those concerns came to a head, exacerbated by the 13-month highs in bond yields benchmarked to the U.S. 10-year Treasury note and the spike in the Dollar Index to near 92. 

Data on Friday also showed that U.S. drillers were also starting to take advantage of an earlier spike in prices on optimism about returning demand, adding the most rigs for extracting oil since January in the week through Friday.

The oil drilling rig tally, an early indicator of future production, rose by nine to 318 last week, the highest since April, energy services firm Baker Hughes Co said in its closely followed report. 

The rig count has been rising over the past seven months and is up nearly 70% from a record low of 244 in August.

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