Oilprices fell sharply on Tuesday, remaining under decent selling pressure onWednesday. Prices remain in the red for a third consecutive day. The UScurrency strengthened, while some of the EU countries extended lockdowns andpaused vaccination due to concerns about vaccine side effects, thus delayingeconomy reopening - such a news background discourages bidding. Although Chinafigures on Monday beat estimates, they largely failed to prop up marketsentiment as the effect of low base played down surprise. Industrial productiongrew by 35.1% on an annualized basis, and retail sales by 33.8%, which ishigher than the forecast, but peak of the recession due to Chinese lockdownslast year fell on February-March, so there is nothing to be surprised at - thisis just a rebound from the through. There is a similar dynamic in oil demand - Chineserefineries processed 14.19 million b/d in January-February of 2021, which is12.12 million b/d higher compared to January-February last year, however,comparing with December 2020, the demand appears to have reached a plateau.

However,the key challenge for the market – shale oil output, remains muted, lettingOPEC more effectively manage prices. US output recovers slowly and EIA’s reporton drilling activity released on Monday indicated that the output is expectedto decline in April by 46K to 7.46 million b/d. The number of drilled butuncompleted wells continue to decline and has already reached its lowest levelsince November 2018. The lower this number, the lower potential for quickrebound in production.

Therehas also been at least a pause in the term structure of oil prices (aka futurescurve) in the recent backwardation trend - the spread between the near and farcontract has stabilized and started to rise even after the boost from OPECdecision on March 4:

Technically,the uptrend in oil has been quite steep when compared to historical episodes ofstrengthening. Quotes have gone far from the moving averages, and the maximumdivergence has formed from the 200-day moving average since 2008:

Keyevents to watch out for are the post-Lunar New Year recovery in China, datarelease on Asian production and trade, and the EU vaccine challenge. If thenews background continues to deteriorate, the risk of a mid-term correctionwill significantly increase given fragility on these elevated price levels.

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