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Oil Plunge showing Signs of a Market That Got Too Bullish, Too Fast
Oil & Gas | 19 March 2021

For the individuals who had been tracking oil’s technical indicators this month, the message was clear: Crude prices had risen excessively fast, as reported by Bloomberg.

OPEC's choice to get control over creation recently, hedge funds piling into the most bullish situations in longer than a year, and an attack on a Saudi Arabian oil complex all attempted to propel Brent crude past $70 a barrel for the first time in more than a year. Prices transcended the upper Bollinger band that flagged a pullback was all but inevitable. In the meantime, fuel refiners along the U.S. Gulf Coast were struggling to recover from a profound freeze a month ago and the speed of oil trades had eased back, weighing on near-term demand. Yet, practically no one is saying the rally is over for good.

"Some setback” will undoubtedly occur on the road to longer-term recovery, said Giovanni Staunovo, a commodity analyst at UBS Group AG. Yet, "with OPEC and its partners seeking to a longer-term recovery, the oil market ought to be undersupplied and oil prices will recuperate once more," he added.

Among the most remarkable movements in the oil market, this year has been a move of the oil futures curve further into a bullish pattern known as backwardation. That is still holding up.

Backwardation is a key sign that demand is strengthening and supplies are tightening, causing contracts for the nearest deliveries to trade at a premium to later ones: Buyers need the crude as soon as possible and are willing to for that. In any case, that pattern could shift, as well, if the selloff grabs hold in the coming days. It has already weakened somewhat and in certain parts of the curve, it has turned to the inverse.

"The backwardation curve is just not as steep as it might have been," said Tariq Zahir, managing member from the worldwide macro program at Tyche Capital Advisors LLC.

Commodities across the board drooped on Thursday alongside stocks and bonds as markets were additionally grasped by fears that the U.S. Federal Reserve risks allowing inflation to speed up.

“Don’t mistake a correction for a derailment," JPMorgan Chase and Co. analyst Natasha Kaneva wrote in a note to customers. "The price move was likely emphasized by a washout of investor length which has been consistently ascending since late last year."

The rates of crude-processing in the U.S. Gulf are stuck at about 80% of levels seen before the winter storm hit the area, with refiners not hurrying to increase production with greater-than-usual reserves to depend on.


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