By Barani Krishnan
Investing.com - Crude prices rebounded meaningfully on Friday from the previous session’s plunge, helped by weaker bond yields, the dollar's retreat from its highs and buying of oil on-the-dips.
But a loss of nearly 7% on the week shattered the myth of oil’s indestructible rally since October, indicating more downside and higher volatility going forth.
New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled the day’s trade up $1.42, or 2.4%, at $61.42, retracing part of Thursday’s 7.1% drop.
London-traded Brent, the global benchmark for crude, finished Friday’s trade up $1.25, or 2%, at $64.53, after the previous session drop of 7%.
But for the week, WTI fell 6.4% while Brent lost 6.8%.
It was the biggest slump for both benchmarks since the week ended Oct. 23.
In the past almost five months, crude prices had mostly gone in one direction — up — after riding on OPEC+ production cuts, falling crude inventories in developed countries and the promise of economic reopenings from COVID-19. From around $36 per barrel at the end October, WTI shot up to almost $68 last week.
What was almost completely overlooked 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, alarmingly slow pace of vaccinations and new lockdowns were also treated with little seriousness — until Thursday’s plunge.
While the sell-off in the previous session appeared overdone from a perfect storm of negativity — that included bond yields ramping to 13-month highs of 1.7% and a Dollar Index nearing 92 — it proved that it can happen again.
“The magic of the so-called one-way trade has been broken,” said John Kilduff, founding partner at Again Capital, a New York-based energy hedge fund. “There’s a reset now of expectations, and that below $60 WTI is possible again if the market gets ahead of itself, without supportive data.”
Helping oil’s upside on Friday was a slide in bond yields and the dollar’s retreat from session highs, along with the United States administering its 100 millionth COVID-19 vaccine and the approval given by Europe's medicines regulator to the Oxford-AstraZeneca dose that at least a dozen countries on the bloc had stopped using out of safety concerns.
But working against those positives was a third wave of infections in Europe and increasing lockdowns in places like Italy.
The oncoming of U.S. refinery maintenance season that could raise crude stockpiles in the country and the possibility of higher crude production out of Libya and a still-sanctioned Iran could also offset some of the bullish sentiment delivered for months by OPEC+ cuts.
Technical charts also indicated there could more volatility ahead.
“Further upside for WTI is subject to it reaching $63.10,” said Sunil Kumar Dixit of SK Dixit Charting in Kolkata, India. “Failure to do could open it to the risk of a bottom below the recent $58.23.”