Oil came back from a sell-off that investment banks from Goldman Sachs to Morgan Stanley said was excessive and offered an opportunity to buy, with physical crude markets still showing signs of strength in the long run.

Futures in New York rose 2.4 per cent on Friday, after a plunge of more than 7 per cent in the previous session. While the market may have gotten too long for its own good, the recent price weakness is likely temporary as signs remain that demand is set to recover and supplies will tighten.

“What happened yesterday is not indicative of overly soft physical markets,” said Michael Tran, an analyst at RBC Capital Markets. “The market was getting pretty stretched, so given the general headlines of China slowing to some degree, COVID returning in Europe and demand maybe not being as robust as people had thought, these are all just convenient opportunities for the market to rebase, retrench and reload heading into the summer.”

Still, prices are headed for the worst week since October. A combination of factors conspired to bring a 30 per cent-plus rally this year to a screeching halt: Treasury yields that pushed the dollar higher, signs of weaker consumption in Asia in the short-term and the unwinding of long positions by commodity trading advisors. Technical indicators had shown a market correction was overdue.

But even after the abrupt setback, futures are still up more than 20 per cent so far in 2021 on prospects for a recovery this year from the coronavirus pandemic and OPEC+’s output discipline thus far.

The sell-off will prove to be “transient” and this week’s decline presents a buying opportunity, Goldman analyst Damien Courvalin said in a note. There will still be a swift rebalancing of the market, with vaccinations driving an increase in mobility, he said.

Undersupply is likely to continue through this year should demand accelerate and OPEC+ continuing to show output restraint, Morgan Stanley said in a report. In that case, the market should remain in deficit, allowing inventories for countries in the Organization of Economic Cooperation and Development to normalize during the third quarter, analysts Martijn Rats and Amy Sergeant wrote.

Meanwhile, Saudi Arabia said a drone attack at an Aramco refinery in Riyadh had no impact on oil supplies, according to the country’s state-run Saudi Press Agency, which said Yemen’s Iran-backed Houthi rebels were behind the attack.

Prices:

• West Texas Intermediate for April delivery added US$1.42 to settle at US$61.42 a barrel in New York
• More actively traded May contract is set for a 6.4 per cent weekly decline

The S&P 500 Energy Index rose Friday after slumping 4.7 per cent on Thursday, recouping some of the losses from its biggest decline in more than three months.

For now, there are signs of weakness in physical market demand, particularly in Asia. At the same time, Europe’s vaccine rollout remains sluggish -- another headwind for the recovery in consumption. The oil market’s structure also weakened markedly. Key gauges of supply for West Texas Intermediate and Brent crude veered nearer to a bearish contango structure, signaling oversupply.

Still, data from the U.S. suggest that the latest bout of fiscal stimulus may help to spur travel there, while a dozen states are expanding access to COVID-19 vaccinations earlier than planned.

“Don’t mistake a correction for a derailment,” JPMorgan Chase & Co. analyst Natasha Kaneva wrote in a note to clients. “The price move was likely accentuated by a washout of investor length which has been steadily rising since late last year.”

Related coverage:

• America’s refiners are taking their time to come back to full capacity after the Arctic blast. In the Gulf energy belt, processing rates are stuck at about 80 per cent of levels seen before the storm.
• Outbound diesel shipments from China jumped last month as Beijing’s move to release more fuel export quotas lifted flows, and factory activity slowed over the Lunar New Year holidays in mid-February.
• West Africa’s rate of unsold crude is higher than normal, with 40 to 50 cargoes due for loading by end-April yet to find buyers, as slow sales spread, according to traders familiar with the matter.