Oil prices are retreating and a month-long rally is faltering as traders return their focus to a heavy oversupply in storage.
Light, sweet crude for April delivery recently fell $1.02, or 2.7%, to $36.16 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, fell 85 cents, or 2.2%, to $38.68 a barrel on ICE Futures Europe. After more than a month of gains, crude is now down in three of the last four sessions.
There have been some bullish signs on declining supply and surging demand, but not enough to fundamentally alter a market that has been oversupplied and crashing for nearly two years, analysts said. Of the three major international agencies that recently released updated outlooks, none tightened their forecast for oversupplied markets, Dominick Chirichella, analyst at the Energy Management Institute, said in a note.
Citigroup analysts on Monday had attributed a lot of the move simply to fast-moving fund managers taking extreme positions. By the end of the first week of March, hedge funds, pension funds and others had doubled their net-bullish position on U.S. oil in just two months, and set a record for their number of bullish bets on Brent.
Prices had followed, up 20% in that period. Many analysts attributed that rally to a process called short-covering, in which bearish traders close their positions, but have to buy back contracts to do it, sending prices higher.
“Short-covering seems to have run its course … as hopes surrounding production ‘freeze’ talks evaporate,” said Matt Smith, director of commodity research at ClipperData.
Talk of a freeze from giant oil producers including Russia and Saudi Arabia had been among the rally’s biggest drivers but members of the Organization of the Petroleum Exporting Countries can’t agree on key issues for a potential freeze agreement—or even when and where to discuss it. OPEC’s March report, released Monday, also lowered its demand forecast for its crude this year by 90,000 barrels a day to 31.52 million barrels.
In Iraqi Kurdistan, the Ceyhan pipeline closed in mid-February due to an attack, taking oil off the market. But the pipeline is likely to restart operation soon and transports around 600,000 barrels of oil a day to Turkey, according to January data from the Kurdistan Regional Government in Iraq.
Demand from drivers has surged in the U.S., but it is unclear whether that will continue to boost the crude market, analysts said. Refineries are likely to start long-deferred maintenance in the next few weeks, and that could limit their demand for oil, even while gasoline and diesel prices are likely to keep getting support from the limited supply, analysts at Wolfe Research LLC said in a note released overnight.
Gasoline futures recently fell 1.4% to $1.4024 a gallon and diesel futures fell 1.8% to $1.1754 a gallon.
Tomorrow, EIA is going to release the weekly report on the US oil market. If the persistence of decreasing supply can maintain, the future of oil market will be more positive for the aligning of US oil companies who did control the supply according to the agreements.