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Saudi refinery attack pushes oil prices up again, but will they last?

Oil futures climbed toward their highest levels of the trading session last Friday, buoyed by reports that an oil facility in Saudi Arabia was attacked by drones. A day before, oil prices crashed

Prices began to bounce back on Friday despite a recent aggressive oil price rally appearing to have come to an end The oil market this year has seen a move of the oil futures curve further into a bullish pattern known as backwardation But that pattern could shift, too, if the selloff takes hold in the coming days

Oil futures climbed toward their highest levels of the trading session last Friday, buoyed by reports that an oil facility in Saudi Arabia was attacked by drones. Aljazeera reported that Saudi Arabia said drones struck an oil facility in the capital of Riyadh Friday and ignited a fire, though authorities did not name the facility.

 Earlier this month, attacks on Saudi Arabia’s oil and military facilities have been blamed on Iran-backed Houthi rebels. 

April West Texas Intermediate crude rose $1.10, or 1.8%, to trade at $61.10 a barrel on the New York Mercantile Exchange, while May Brent crude added 94 cents, or 1.5%, to $64.22 a barrel on ICE Futures Europe.

Prices began to bounce back on Friday despite a recent aggressive oil price rally appearing to have come to an end, with WTI having lost more than $7 in one week. 

Crude oil plunged by between 7% and 10% a day before on Thursday, March 16, 2021, the worst single-day loss since April 2020.

The decline is the result of a combination of bearish factors – profit-taking by overly long speculators, a stronger dollar, and diminished hopes surrounding vaccinations in Europe. 

“There have been some bearish headlines over the last two weeks,” Helge Andre Martinsen, senior oil analyst at DNB Bank ASA, told Bloomberg. “But it’s surprising that it happened in just one day.” 

Vaccine hiccups in Europe due to delays and increased hesitancy could prevent 1 million bpd of oil demand, according to Rystad Energy.

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Oil prices too bullish

Crude prices had risen too quickly, according to Bloomberg.

OPEC’s decision to rein in production earlier this month, hedge funds piling into the most bullish positions in over a year, and an attack on a Saudi oil complex all worked to propel Brent crude past $70 a barrel for the first time in more than a year. 

On Thursday, oil’s 30%-plus rally this year came crashing down. West Texas Intermediate crude futures plunged as much as 9.9% before tampering. 

Giovanni Staunovo, a commodity analyst at UBS Group AG, said “Some setback” was bound to happen on the road to longer-term recovery. 

“But with OPEC and its allies pursuing a cautious approach on production, the oil market should be undersupplied and oil prices will recover again.”

Among the most notable shifts in the oil market this year has been a move of the oil futures curve further into a bullish pattern known as backwardation. That’s still holding up.

Backwardation is a key indication that demand is strengthening and supplies are tightening, causing contracts for the nearest deliveries to trade at a premium to later ones: Buyers want the crude as soon as possible and are willing to pay for that. 

But that pattern could shift, too, if the selloff takes hold in the coming days. It has already weakened somewhat and, in some parts of the curve, it has flipped to the opposite.

Crude-processing rates in the US Gulf Coast are stuck at about 80% of levels seen before the winter storm hit the region, with refiners not rushing to ramp up production with bigger-than-usual stockpiles to fall back on.