Brent Climbs Above $60 With Trading Houses Divided on Rally

Brent Climbs Above $60 With Trading Houses Divided on Rally
Andres Guerra Luz and Alex Longley

(Bloomberg) -- Oil in London extended gains above $60 a barrel for the first time in more than a year in a rally that’s dividing the world’s top oil trading houses.

Global benchmark Brent futures surged as much as 2.2% on Monday. Surpassing the key marker is another milestone in a stellar comeback from the depths of the pandemic, which forced countries to lock down and devastated economies. Trading house Trafigura Group sees prices moving even higher as refiners increase processing rates to meet rising product demand amid tight physical crude supplies.

However, with a full-fledged demand recovery yet to take a shape, futures may have rallied too far too fast, especially with key technical indicators signaling crude is in overbought territory. The world’s largest independent oil trader, Vitol SA, and rival Gunvor Group Ltd. both expressed caution over the recent rally.

“Be concerned all you want, but oil prices continue to rip,” said Bob Yawger, head of the futures division at Mizuho Securities. “There are some good demand-side factors and some good supply-side factors, which are all conspiring to push prices higher. But they could trade lower fast at any given moment.”

Helping buttress oil’s recovery has been a historical production cut agreement by OPEC+: Global stockpiles in onshore tanks and floating storage are estimated by the International Energy Agency to have shrunk by about 300 million barrels since the group made deep reductions in May. Meanwhile, reduced supply and a Covid-19 vaccine-driven demand boost have entrenched the oil futures price curve in a bullish backwardation structure, which encourages more draining of oil tanks.

See also: Oil’s Remarkable Rebound From a Year of Catastrophe

China has been a key driver of the market rebound. The number of tankers sailing toward the nation jumped to a six-month high on Friday. Royal Dutch Shell Plc Chief Executive Officer Ben van Beurden said last week that fuel sales in China are back into “significant growth mode.” Meanwhile, Indian demand is almost back to year-ago levels as consumption of cooking fuels and gasoline surged on the back of forced lifestyle changes due to the virus.

Aside from WTI and Brent’s 14 Day Relative Strength Index’s hovering above the 70 level, pointing to oil being overbought, other technicals also suggest a correction is in store for crude’s red-hot rally. Both benchmarks are trading above their upper Bollinger bands, a sign to some investors that prices may be due for a pullback.

See also, Oil’s Recovery Is Too Fast for Its Own Good: Julian Lee

The market is “getting ahead of itself in terms of a post-vaccine euphoria,” Mike Muller, the head of Vitol’s Asian operations, said Sunday in an interview with Dubai-based consultant Gulf Intelligence. Gains beyond $60 a barrel are unlikely because that would prompt energy companies to ramp up production, Gunvor Chief Executive Officer Torbjorn Tornqvist said on Friday.

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