Oil rally loses steam after cruising to fresh 2016 highs
London (Jun 9) The rally in oil prices took a breather on Thursday, after hitting fresh 2016 highs earlier in the session on the back of strong Chinese import data and falling U.S. crude inventories.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in July CLN6, -0.94% dropped 18 cents, or 0.4%, to $51.05 a barrel, easing back from a three-day rally. August Brent crude LCOQ6, -1.09% on London’s ICE Futures exchange lost 38 cents, or 0.7%, to $52.13 a barrel.
Earlier on Thursday, both contracts climbed to new 2016 highs at $51.67 and $52.86, respectively.
Traders, however, are starting to question whether the rally can continue. That’s because higher prices are likely to encourage a stream of production restarts, in instances that had gone off the markets earlier because of poor margins.
There is a real risk that rising profitability may encourage more production, said Barnabas Gan, economist at OCBC Bank, cautioning that the oil price slump over the past few months had after all been triggered by a flood of oil supplies.
“We have to wait and see,” says Gan. “It is quite clear that the market sentiment is bullish.”
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The U.S. Energy Information Administration said U.S. output increased by 10,000 barrels last week compared with the week before, raising questions about whether the rebounding market is already leading U.S. producers to pump more.
“Crude oil is unlikely to push much higher from these levels,” says Gnanasekar Thiagarajan, director of Commtrendz Risk Management. “I expect prices to hold around these levels.”
He said the optimistic sentiment is likely to wane once the market starts to overlook immediate triggers such as the supply outage in Nigeria and market readjusts to the possibility of production restarts.
The militant group Niger Delta Avengers has vowed to shutter the country’s oil operations. Multiple attacks on key pipelines and facilities have reduced Nigeria’s daily oil output to around 1 million barrels.
Strong crude oil imports in May to China, the world’s second-largest oil consumer, added a layer to the current bullish sentiment.
Oil has also benefited from a surge in general investment interest in commodities, as concerns about the possibility of a U.S. interest rate rise later this month abated, following weak U.S. jobs data that reduced dollar strength.
Investors will still be awaiting any signals from the Federal Reserve that it may go ahead and raise rates either in July or September, which could act as a dampener to the current optimism.
Elsewhere in the energy market, gasoline for July RBN6, -1.29% fell 0.7% to $1.61 a gallon, while natural gas for the same month NGN16, +0.24% dropped 0.4% to $2.46 per million British thermal units.
Source: Reuters
