Turbulent Time for the Oil Market with Contango and the Suez Canal Blockage

Turbulent Time for the Oil Market with Contango and the Suez Canal Blockage
TradeGM Analysis date_range March 26th, 2021

For the first time this year, a key indicator of sentiment in the oil market has gone negative. With the third wave of COVID-19 crippling Europe, optimistic forecasts for the energy sector are dwindling.

The price of crude has fallen nearly 4% this week, retaining its third consecutive weekly decline. As the COVID-19 cases rise and new lockdowns and restrictions are implemented, so rises the concern that the energy market bounce back might not happen as soon as many had hoped. France and Italy were the first to report national lockdowns, with Germany joining later.

On Thursday, March 25th, Brent crude was trading at roughly $61 per barrel, a significant drop from the $70 mark that it experienced mid-month.

“If lockdowns continue for long, it is almost certain that oil demand will not recover as quickly as though in the beginning of the year. Lower-than-expected oil demand, of course, means that oil prices will take a hit, and that is what traders have been pricing in recently,” Bjornar Tonhaugen, Rystad Energy’s Head of Oil Markets said, reports MarketsInsider.

The same article explains that the widely traded brent futures markets show that traders expect the demand to subside. The price of crude for near-term delivery has fallen below those futures contracts for delivery at a later date. This is known as a ”contango” market, which typically results in price tumbles.

There is hope yet..

On Friday, March 26th, both the WTI and Brent are rallying almost 2% in the wake of the Suez Canal blockage. Oil prices are on a path for recovery as fears of a prolonged blockage sink in. It appears that it could take weeks to dislodge the giant container ship that is currently stuck in the Suez Canal. Brent crude is trading around $63 this morning, and WTI is up 2.1% after having tumbled $4.3 at $59.78 a barrel.

The container stuck in the Suez Canal is hindering one of the busiest trading routes between Asia and Europe. Approximately 12% of global trade passes through it, with Brent, gas, and refined oil accounting for 5-10% of it. A prolonged blockage would result in tightened supplies of oil and refined fuels, among other goods.

“Fears of supply tightness grew as the key Suez Canal remained blocked by the giant ship, outweighing concerns over weak demand due to lockdowns in Europe and Asia,” said Satoru Yoshida, a commodity analyst with Rakuten Securities, according to Reuters.

The energy markets were also boosted by the growing political concerns in the Middle East. Iran-backed Yemeni Houthi rebels continue to launch attacks on Saudi Aramco’s oil facilities.

These events coupled with coronavirus vaccine shipments, which should reach 70% of the target in the second quarter, OPEC+ output discipline, and ever-growing demand from China, should be enough to propel Brent to resume its bull rally.

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