Oil 11
Some of that storage still needs to be used up... Demand worries are what tripped up oil's current spike. Image Credit: Reuters

New York: Oil slipped below $58 a barrel as a recent rally fizzled with the COVID-19 pandemic continuing to weigh on demand outlook and as one technical indicator signaled prices may have climbed too far, too fast.

Futures in New York fell for a second session on Friday after surging more than 12 per cent for the longest run of gains in two years. The enduring outbreak continues to crimp fuel consumption from China to the US, with the International Energy Agency cutting its demand forecast for 2021 and describing the market as fragile.

The US government earlier this week also predicted the nation's petroleum demand will likely need much more time to recover.

Holding on... or go even higher?

Despite the bearish sentiment, oil is still set to eke out a weekly gain and some are optimistic on the longer term outlook, including the IEA. The market is tightening, traders such as Trafigura Group see prices moving higher, and Citigroup Inc. is predicting Brent crude may hit $70 a barrel by year-end.

Oil's rapid rebound from the depths of the pandemic has accelerated this year after Saudi Arabia pledged to deepen output cuts. Prompt timespreads have firmed in a bullish backwardation structure, helping to unwind bloated stockpiles held in onshore tanks and on ships that swelled during the outbreak.

While the recent eight-day rally pushed oil prices to the highest level in a year, it also sent crude's 14-day Relative Strength Index firmly into overbought territory, signaling a correction was due. A stronger dollar also reduced the appeal of commodities like oil priced in the currency.

Needed a break

"It was a long, uninterrupted rally that had to take a breather," said Vandana Hari, founder of consultancy Vanda Insights. "The next leg up in prices may need reassurance that OPEC+ do not proceed to open the spigots from April."

The IEA cut its forecast for world oil consumption in 2021 by 200,000 barrels a day, according to a report released on Thursday. The agency also boosted its projection for supplies outside the OPEC cartel by 400,000 barrels a day as a price recovery spurs investment.

Still, the IEA predicted a rapid stock draw during the second-half, while OPEC estimated stronger global demand over the same period. The cartel increased its forecast for the amount of crude it will need to supply in 2021 by 340,000 barrels a day on weaker output from rival producers, according to a separate report.