By Barani Krishnan
Investing.com - It’s far from over, almost everyone would agree, but oil’s overextended rally certainly needed a correction and a third weekly loss seems to point toward that.
Barely a month ago, even bulls in the market seemed astounded at how stretched crude’s valuations could get as WTI and Brent notched one weekly gain after another. The U.S. benchmark had an uninterrupted nine-week rally from the week ended Aug 27, while its U.K. peer had seven weeks in all.
But since mid-October, oil’s mega-hyped rally hit a bump on persistent inflation scares in the United States and President Joe Biden’s warning of a strike back against “price-gouging” in the energy sector. The last straw seemed to be producer group OPEC’s own downgrading this week of demand for crude in the fourth quarter.
“It’s surprising how sensitive the market had suddenly gotten to all these talk, considering how bellicose oil bulls were just a month back to any talk of a correction as all sights were set on $90 crude and beyond,” said John Kilduff, the founding partner of New York energy hedge fund Again Capital.
West Texas Intermediate, the U.S. crude benchmark, was down $1.11, or 1.4%, at $80.48 per barrel. For the week, WTI was down almost 1%, after the back-to-back losses of 2.8% and 0.2% respectively in the previous two weeks. But compared to WTI’s seven-year highs above $85 in October, the deficit was just a drop in the barrel, so to speak. The U.S. crude benchmark also remains up 65% for the year.
London-traded Brent crude, the global benchmark for oil, was down $1.02, or 1.2%, to $81.85 on the day. For the week, Brent was down 1.1%, after the back-to-back losses of 1.9% and 1.3% respectively in the previous two weeks. Brent scaled a three-year high above $86 last month and remains up 58% for the year.
While crude bears may take some joy at having shaken the tree-tops of the oil rally, each of the circumstances that had driven the market lower in the past three weeks had their own issues.
Case in point: Inflation.
The Labor Department reported that the U.S. Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% during the year to October. It was the fastest growth of the so-called CPI since November 1990, an acceleration driven mostly by pump prices of fuel running at seven-year highs.
But the University of Michigan said in its closely-watched consumer poll released on Friday that most Americans had become accepting of high inflation as a way of life in the future despite consumer sentiment falling to a decade low.
As for Biden, if he were to try and counter high pump prices of fuel by releasing crude from the U.S. Strategic Petroleum Reserve, that could bring its own problems when a real emergency shortage of crude arises in the United States.
“Also, whatever SPR release planned by the White House might not be enough to counter further production cuts that OPEC might do in retaliation,” said Kilduff. “But if the U.S. teams up with China to synchronize their SPR releases — and they could, given their improving relations — then it might make a difference. The two biggest oil importers are both suffering now from high crude prices.”