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  • WTI dropped sharply on Thursday but managed to finish the session above lows in the $57.00s at above $58.00.
  • Middle Eastern geopolitical risk is back on the radar of the market, helping lift crude oil from lows.

Front-month WTI futures contracts saw a modest recovery from session lows in the mid-$57.00s and managed to close Thursday trade back above the $58.00 level (futures trade has now paused until 22:00GMT). That means that WTI closed the day with losses of nearly $3.0 or 4.6%, though WTI did manage to avoid setting fresh weekly lows.

Driving the day

It appears that Wednesday’s recovery rally was nothing more than a dead cat bounce. As a recap, Wednesday’s rally was put down to supply concerns after a tanker run aground and blocked the Suez Canal, a key chokepoint for global crude oil markets (where it is still blocked and could be for a few more weeks). But the positive impulse from this story appears to have already waned, with focus returning to the worsening pandemic outlook in Europe and some key emerging economies (Brazil and India).

According to Rystad Energy analyst Bjornar Tonhaugen, “if Europe was in a better state in its COVID-19 battle, then the disruption would possibly create a more prolonged issue but this is not the case”¦ That is why traders today quickly corrected some of the previous day’s gains”. Other desks have been arguing that the impact on oil markets will not be as bad as feared given there are oil pipelines running adjacent to the canal, but will be more of an issue for refined products. Citi argues that it is this very realisation that has seen markets unwind Wednesday’s gains.

Another bearish factor to note has been the continued grind higher in USD – WTI typically has a negative correlation to USD given that when USD appreciates it makes WTI more expensive for international buyers.

But it seems as though geopolitics may be coming to the rescue; oil markets picked up a little from lows on the news that an Iranian missile had been fired at an Israeli ship in the Arabian sea. Elsewhere, and these reports emerged while futures trade has been halted and so the market impact has not yet been seen, Saudi Arabia just announced that a petroleum distribution station in Jazan was attacked by the Houthis and a fire has since broken out. The Middle East remains (as ever) a tinder box, and as the frequency of attacks on Saudi facilities increases, geopolitical risk premia will likely support crude oil.

Looking ahead, the main driver of crude prices next week will be the OPEC+ meeting on 1 April (next Thursday). As noted above, recent higher than usual levels of crude oil market volatility might well continue heading into the meeting as various OPEC+ sources leak the varied viewpoints of cartel members going into discussions; most agree that another hike in output at this point is unlikely given 1) the above-mentioned demand concerns in Europe and elsewhere and 2) the recent sharp drop in prices from monthly highs (WTI currently trades more than 13% below its March high of just under $68.00) – OPEC sources said on Wednesday that a rollover of current production levels is the most likely outcome.