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Oil Tumbles Most Since October on Concern Over Short-Term Demand

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(Bloomberg) —

Crude slid more than 6%, casting a cloud over a market that earlier this month saw prices rally more than a third since the beginning of the year.

The market for physical crude barrels in Asia is showing signs of weakness, with muted buying coming from China. At the same time, a shaky Covid-19 vaccine rollout in parts of the world, such as Europe, spells trouble for a complete recovery in mobility –and consumption — in the near-term.

Futures in New York tumbled by the most on an intraday basis since October on Thursday and are poised to extend the stretch of daily losses to the longest in over a year.Oil’s move lower may also be linked to some unwinding of long positions from commodity trading advisors as daily price gains or losses of more than 3% can often trigger this account group to quickly unload.

“This is a risk-off moment with some of the cyclical trades,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. Oil prices will likely “test the lower end of this trading range, because we don’t have a whole global reopening. We’re behind on vaccines outside the U.S., the U.K. and Israel, and parts of Europe are having to shut back down.”

A stronger dollar is also reducing the appeal of commodities priced in the currency, such as oil.

Crude in New York rallied beyond $67 a barrel this month and the global benchmark Brent topped $71 with the Organization of Petroleum Exporting Countries and allies continuing to curb supplies and prop up prices. However, the International Energy Agency sent a warning out to investors this week: the agency said oil markets are not on the verge of a new price supercycle and any concerns of supply shortfalls are misguided.

Beyond headline prices, crude’s closest timespreads are also reflecting the fragile near-term outlook. West Texas Intermediate crude’s front-month contract is trading at a discount to the following month, while Brent’s backwardation — a bullish structure signaling tighter supplies — is weakening.

“The sentiment has changed,” said Tamas Varga, an analyst at PVM Oil Associates Ltd. “Short-term supply and demand considerations are temporarily casting a shadow over the bright future that is likely to arrive in the third quarter of the year.”

The global recovery from the pandemic remains uneven. In Brazil, Covid-19 cases are expanding by record numbers and crimping activity, while in the U.K., delayed shipments of AstraZeneca Plc’s vaccine will cut supply this month.

“Demand hasn’t gotten as far back to normal as we expected, with the vaccine news out of Europe definitely concerning in terms of short-term demand,” said Michael Lynch, president of Strategic Energy & Economic Research. “That’s making people think that the time for $70 Brent has not yet come.”

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