Oil Drops With Recent Global Markets Rally Taking a Breather

(Bloomberg) -- Oil declined as a recent rally in equities and commodities paused.

Futures in New York dropped 1.1% on Friday as raw materials cooled from a scorching rally, while the dollar climbed making commodities priced in the currency less attractive. Prices remain on track for a weekly gain after topping $65 a barrel on Thursday for the first time since mid-March.

The prospects for higher fuel consumption from the U.S., China and the U.K have brightened the outlook with traders betting that a steady reopening of economies will continue to boost demand. Still, a resurgent virus, especially in India, remains a threat to the recovery.

Travel across China is expected to pick up over an extended Labor Day holiday. Meanwhile major U.S. cities are moving to fully reopen and much of Wall Street remains bullish about consumption over the coming months. Goldman Sachs Group Inc. this week said demand could post a record jump as vaccination rates increase.

“The near-term outlook is still bullish for oil,” said Stephen Brennock, an analyst at PVM Oil Associates. “India’s Covid woes are the exception rather than the rule.”

The short-term risks to the demand outlook are starting to show up in gauges of market health. The structure of the Middle Eastern Dubai benchmark flipped to a slight contango on Thursday, an indication that market tightness may be easing. The backwardation in the prompt timespread for Brent crude has also narrowed this week.

See also: Pimco Says Commodity Rally Reveals Shortages of Vital Materials

Commodities across the board have rallied in recent sessions, driven by optimism on the recovery in key economies and tightening supplies of raw materials. That’s pushed the Bloomberg Spot Commodity Index to the highest level since 2012 this week.

“This week saw an avalanche of strong data and reassuring developments in the U.S, but that may have buried the rising global risk of more transmissible Covid variants,” said Vandana Hari, the founder of energy consultant Vanda Insights in Singapore. “At six-week highs, crude was ripe for a breather.”

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