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Oil Extends Rally as Physical Market Flashes Signs of Tightness

by Clarence Jones

Brent oil closed near a 10-month high on Friday, continuing a rally driven by supply restrictions from OPEC+ leaders. This upward trend in oil prices has been accompanied by an increase in key timespreads, indicating that the market may be undersupplied. Additionally, bullish call options are becoming more expensive, suggesting a growing optimism among traders.

Despite these positive indicators, the recent surge in oil prices has left the market vulnerable to a correction. Earlier in the trading session, crude prices dropped by more than $1 after Saudi Aramco CEO Amin Nasser lowered the company’s long-term demand outlook and Saudi Energy Minister Prince Abdulaziz bin Salman expressed doubts about China’s consumption. However, both Nasser and Prince Abdulaziz expressed confidence in the overall market.

Dennis Kissler, Senior Vice President for trading at BOK Financial Securities, warns that the rapid increase in prices could make the market susceptible to a dramatic selloff in response to any negative news. However, Kissler notes that the fundamentals of the oil market remain tight on the supply side. As long as these fundamentals do not change significantly, the market is likely to be resilient to long-lasting selloffs.

Meanwhile, the physical market for refined oil products, such as diesel, is showing signs of tightness. Refineries worldwide are struggling to produce enough of the industrial fuel, leading to higher prices compared to crude oil.

Overall, oil prices have risen by approximately 10% this year due to the supply restrictions implemented by OPEC+. Speculators have also increased their bullish positions on Brent and US benchmark West Texas Intermediate to a combined 15-month high. This surge in oil prices could potentially contribute to inflationary pressures globally, at a time when central banks are deliberating whether to continue raising interest rates. This upcoming week will be crucial for monetary policy decisions, with announcements expected from the Federal Reserve and the Bank of England, among others.

In conclusion, Brent oil is closing in on a 10-month high driven by supply curbs from OPEC+ leaders. While this rally has several positive indicators, such as undersupply and expensive call options, the market remains vulnerable to a correction. Furthermore, the physical market for refined oil products is experiencing tightness due to insufficient production. As global central banks navigate monetary policy decisions, the surge in oil prices could contribute to inflationary pressures.

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