Oil Drops in Volatile Week While Suez Canal Mishap Persists

Source: By Andres Guerra Luz, Bloomberg • Posted: Thursday, March 25, 2021

Oil dropped amid broader market weakness after two wild sessions that saw prices whipsaw around 6% in both directions, while traders continued to monitor a container ship that’s blocking the Suez Canal.

Futures fell as much as 5.4% in New York on Thursday in the wake of declining equities and a stronger U.S. dollar, which reduces the appeal of commodities priced in the currency. Meanwhile, work to re-float the massive ship that’s stuck in the canal — a key trade route for crude flows — continued without success on Thursday in Egypt.

“The move lower in crude oil prices is being driven by a slowdown in commodity index inflows, a stronger U.S. dollar and weaker global equity markets,” said Ryan Fitzmaurice, commodities strategist at Rabobank. “Modestly lower crude oil prices” will likely persist in the near-term ahead of a seasonal demand pick-up.

Despite the recent sell-off, oil is still up roughly 20% this year and there is confidence in the longer-term outlook for demand as coronavirus vaccinations accelerate worldwide and OPEC+ continues to hold back supply. The alliance is scheduled to meet next week to decide production policy for May.

“It all got a bit too excited earlier with talk about supercycles and massive stock draws in the first quarter,” said Paul Horsnell, head of commodities research at Standard Chartered. That was “never on the cards, the big stock draws come later.”

The prompt timespread for Brent has resumed trading in a bullish backwardation after briefly flipping to a bearish contango on Tuesday for the first time since January. The spread was over 10 cents in backwardation on Thursday, compared with 67 cents at the start of the month.

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Tugs and diggers have so far failed to dislodge the container ship in the Suez Canal, which has led to a gridlock of vessels waiting to pass. Some experts say the crisis could drag on for several days.

The spring tide on Sunday or Monday will add extra depth and allow for more maneuvering, said Nick Sloane, the salvage master responsible for refloating the Costa Concordia.

Other oil-market news:
  • It’s taken a maritime crisis to offer hard-hit oil tanker owners an unexpected reprieve, although the relief is expected to be short-lived.
  • China’s fear of dependence on foreign suppliers means its biggest oil company plans to be the world’s top-spending driller this year, even as it says the nation’s demand for crude is plateauing.
  • The maritime world went into overdrive this week to dislodge one of the world’s biggest ships after it got jammed in Egypt’s Suez Canal, laying bare the fresh challenges the industry must navigate as mammoth vessels play an ever larger role in global trade.

— With assistance by Alex Longley