By Barani Krishnan
Investing.com - Oil is struggling to regain its strong upside of the past four months as new Covid-19 lockdowns in Europe weighed on crude prices trying to recover from the worst week since the end of October.
New York-traded West Texas Intermediate, the benchmark for U.S. crude, seesawed between red and green territory all day before settling up just 15 cents, or 0.2%, at $61.55 per barrel. While that advanced WTI’s 2.4% gain from Friday, it barely moved the needle for a market desperate for a sentiment boost after last week’s net tumble of 6.4%.
London-traded Brent, the global benchmark for crude, settled up a mere 9 cents, or 0.1%, at $64.53. Like WTI, Brent also rose on Friday, gaining 2%, while ending the week lower, by 6.8%.
Last week’s tumble was the first meaningful drop for crude markets after a near five-month rally with few stops that added almost 90% to prices.
On Monday, crude prices could barely break new ground after a meeting chaired by German Chancellor Angela Merkel decided to tighten Covid-19 restrictions, backtracking on a recent easing, as the infection rate in Europe’s largest economy rose to above 100 per 100,000 inhabitants.
Under a draft government plan debated at the meeting, lockdowns would be extended till 18 April, varying in their intensity according to region and impact.
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.
Fawad Razaqzada, analyst at London’s ThinkMarkets said oil has rebounded from an unprecedented low base — particularly from the point of WTI’s negative pricing of minus $40 per barrel last year — and historically high OPEC cuts, backed by optimism now about economic reopenings on Covid-19 vaccinations and the promise of greater travel that could stir pre-pandemic fuel demand.
Yet crude prices could continue to struggle as U.S. supply might grow faster than demand, he said.
“All told, I can’t see oil prices rising significantly further. I think Brent will struggle to stay above $70 and reckon WTI is going to average around $60 per barrel in 2021,” he said.
“The downward momentum may have already started following last week’s sell-off. While I think demand is going to improve further as more economies ease travel restrictions in the coming months, the impact of this will be offset to some degree by rising oil supply. OPEC+ will be easing supply restrictions slowly, while U.S. shale production is likely to ramp up due to the attractive oil prices again.”
Before last week’s plunge, crude prices rose virtually one-way -- up -- on OPEC+ production cuts, the promise of economic reopenings from Covid-19 closures and a blockbuster U.S. pandemic relief that was underway. From a little under $36 per barrel on October 30, WTI rose to just under $68 by March 8. Brent went from under $38 to just above $71 in that same stretch.
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. WTI slumped to $58.20 while Brent fell to $61.45, both a five-week low.
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.