Oil set for biggest weekly drop since October on demand worries

Oil set for biggest weekly drop since October on demand worries

Slide in key crude benchmarks eats into a sharp rally that began in the autumn

Oil prices are on course for their biggest weekly fall since October as signs of flagging demand in key markets abruptly halted a vigorous rally.

International benchmark Brent crude suffered its biggest one-day fall since June on Thursday, leaving it down almost 8 per cent since the end of last week at just under $64 a barrel. West Texas Intermediate, the US benchmark, is down a similar margin for the week to trade at $60.48.

The slide has put the brakes on an almost unbroken rally this year. Brent and WTI have soared more than 60 per cent since early November as the world has begun to reopen in the wake of pandemic-induced lockdowns.

But analysts said the rally had got ahead of itself after Brent pierced the $70-a-barrel level last week, with traders refocusing on renewed lockdown measures in parts of Europe and signs that physical demand in China and the US remained fragile.

“I think the market is catching up with itself in terms of the actual physical demand for crude in China and the United States,” said Christopher Page, senior oil market analyst at Rystad Energy.

In Beijing, authorities were reported to be cracking down on imports of heavy emissions fuels, triggering concerns over the future of some Asian imports. US oil inventories, meanwhile, have increased as petrochemical plants take longer than expected to come back online after the Texas freeze. The Energy Information Administration on Wednesday reported a 2.4m-barrel increase in stocks.

Oil prices had crashed last March, when a glut of Saudi supply hit the market just as economies were shut down by coronavirus lockdowns. WTI plunged into negative territory for the first time ever in April.

That sent production tumbling as oil companies were forced to close wells and lay off thousands of employees. But the recovery has prompted speculation that the US shale patch may return to growth once more.

Some analysts say the weakness in oil markets is unlikely to last, arguing that demand is still likely to rebound strongly later this year as vaccine programmes accelerate — despite short-term issues in Europe — boosting travel and the wider economy.

Michael Tran, commodity strategist at RBC Capital Markets, advised investors to “wait for the flush-out to run its course”.

“Markets rarely move in straight lines and the current soft patch should not detract from what we believe will be a strong summer for global oil demand,” he said.

Goldman Sachs, which like other Wall Street banks has been arguing for higher prices based on stronger demand and long-term fears investment in new supplies has been curtailed too far, on Friday said it still believed Brent prices would hit $80 a barrel this summer.

“Despite this sharp move lower, we still forecast a rapid oil market rebalancing in coming months,” Goldman analyst Damien Courvalin said.

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