A tanker sails northbound on the Suez Canal in Ismailia, Egypt. Oil fluctuated after a container ship blocked the Suez Canal. Image Credit: Bloomberg

Dubai: Oil fluctuated after a container ship blocked the Suez Canal and threatened to disrupt crude shipments following a sell-off that's driven prices to the lowest level since early February.

While investors assess the implications on crude flows due to the grounding of the vessel that has blocked traffic, the market is showing signs of weakness. Futures in New York slumped on Tuesday and have tumbled more than 12 per cent in less than two weeks on a series of factors including softening physical demand, a stronger dollar and the unwinding of long positions. The prompt timespread for global benchmark Brent oil has also flipped into a bearish structure.

Adding to negative sentiment are indications inventories continue to swell. The American Petroleum Institute reported US crude stockpiles rose by almost 3 million barrels last week, according to people familiar with the data.

The recent plunge in oil may put pressure on OPEC+ to do more to try and stem the slide, with the group meeting next week to decide on its production policy for May. Despite the decline, crude is still up almost 20% this year, and as Covid-19 vaccinations accelerate worldwide, there is confidence greater mobility will boost fuel consumption in the longer term.

"Oil's had a deep correction because of near-term demand, but the outlook that consumption will improve remains valid in the longer term," said Will Sungchil Yun, a senior commodities analyst at VI Investment Corp. in Seoul. The Suez Canal blockage might be temporary, he added.

Busy trade route

The Suez Canal is one of the world's busiest maritime trade routes that's vital for the movement of oil to liquefied natural gas. The 400-meter long container ship Ever Given's hull became wedged length-ways across the canal Tuesday.

"It could be having a bit of an impact when you consider about 10% of total seaborne oil trade goes through the Suez Canal, but I imagine any disruption would be very temporary," said Warren Patterson, head of commodities strategy for ING Group in Singapore.

The prompt timespread for global benchmark Brent crude flipped to a bearish contango structure on Tuesday - where near-dated contracts are cheaper than later-dated ones. It was 5 cents in contango on Wednesday, compared with a bullish backwardation of 67 cents at the start of the month.