Crude's rally falters as run-up to $70 just doesn't stick

Futures in New York declined as much as 1.2% on Friday and Brent crude as much as 1 percent before recovering to little changed on the day. That follows the global benchmark’s rally to $70/bbl on Thursday amid a steady run of diminishing U.S. crude stockpiles and healthy demand. Yet, doubts linger that the price rally will persist.

“Fundamentals are strong right now, but we think they will fade somewhat, particularly as we start to get out of the winter,” Michael Wittner, the head of commodities research at Societe Generale SA in New York, said by telephone. “Managed money won’t stay at these extreme levels indefinitely. Bottom line is, right now we’re in the camp that prices are a bit overdone.”

Hedge funds boosted their bullish ICE Brent crude oil bets to a record in the week ended Jan. 2, according to weekly ICE Futures Europe data.

Oil is poised to post a fourth weekly gain as the Organization of Petroleum Exporting Countries and its allies trim output and U.S. inventories shrink. Yet, even though Brent touched $70/bbl, the global benchmark is unlikely to stay around that level and demand momentum would be needed for the entire year for prices to remain higher, according to Francisco Blanch, Bank of America Merrill Lynch’s head of commodities research.

“The market is as bullish as it gets at this point, with little further upside left for now,” said Bjarne Schieldrop, chief commodities analyst at SEB.

WTI for February delivery fell 22 cents to $63.58/bbl at 9:55 a.m. on the New York Mercantile Exchange. Total volume traded was about 18% above the 100-day average. Prices are set for a 3.5% weekly gain. WTI rallied to the highest since December 2014 on Thursday.

Brent for March settlement dipped 12 cents to $69.14/bbl on the London-based ICE Futures Europe exchange after rising above the $70/bbl threshold on Thursday for the first time since 2014. The global benchmark traded at a premium of $5.66 to March WTI.

This week’s U.S. inventory report showed crude stockpiles falling for an eighth week and hitting the lowest levels since August 2015. At the same time, production dropped by the most since October, as a cold snap disrupted operations.

End of era

“Global oil market fundamentals have reached their healthiest state in several years,” Michael Tran, a commodities strategist with RBC Capital Markets in New York, wrote in a note. “It is premature to expect further upside to be sustainable, at least until the market gains a better grasp of the pace of U.S. production growth.”

Meanwhile, legendary oil tycoon T. Boone Pickens is closing his hedge fund, saying trading oil has lost its luster. The onetime Texas oil wildcatter wrote in a LinkedIn post that he wants to invest in “personal passions like promoting unbridled entrepreneurship and philanthropic and political endeavors.”

“He’s a very high-profile guy and his firm has been a big player, so maybe it’s the end of an era,” Wittner said.