- Crude oil prices climbed as much as 4% on Wednesday to roughly $60 per barrel, boosted by concern over a supply bottleneck.
- A container ship is blocking the Suez Canal, which is one of the busiest trade routes in the world.
- Oil prices have been highly volatile throughout the pandemic and lockdown cycles.
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Oil rose as much as 4% on Wednesday after a huge container ship ran aground and blocked the Suez Canal, a key shipping route for crude and refined products. The blockage raised some concern about fuel supply.
Overall, the price of oil is set to fall for the third consecutive week this week. Another round of lockdowns in Europe could threaten the recovery in demand growth and have undermined some of the recent strength in the oil market.
One of the biggest container ships in the canal ran aground early on Tuesday and is stuck at a right-angle to the passage. Hundreds of cargo ships are now unable to pass through the canal, forcing them to divert their routes. It is unclear when the issue will be resolved. “This could have an impact on movement of oil and consumer goods.” Deutsche Bank strategist Jim Reid said in a daily report.
Throughout the pandemic and subsequent cycles of lockdowns and travel bans, oil prices have been highly volatile. Over the last 12 months, Brent crude oil prices have fluctuated from as little as $16 a barrel to as much as $71. As demand for oil, and therefore its price, is inherently linked to sectors that are impacted heavily by lockdown measures, such as travel, they have been sensitive to the developments of the pandemic. Over the last two weeks, prices have fallen by around 12% and are still on course for a third weekly fall, in spite of Wednesday’s rally.
The price response to the hold-up at the Suez Canal may not reflect expectations for a prolonged improvement in demand, analysts said. The futures market has eliminated a bullish structure known as “backwardation” – where prompt contracts trade at a premium to further-out futures contracts, which reflects bullishness among traders and investors about the demand outlook.
“The reprieve seems temporary, though, as the spot price fall overnight has completely removed the backwardation in the oil futures market for prompt deliveries. With speculative markets still long, it seems, oil is likely to be a sell on rallies until Covid-19 and economic recovery sentiment swings back into the black.” Jeffrey Halley, senior market analyst at OANDA, said.