"The surge in crude prices over the past week has pushed crude out of its one-month range and within reach of USD 90 a barrel -- but to reach that goal, the market has to fret more about OPEC than a barrage of negative fundamentals," said Lawrence Eagles, an analyst at JP Morgan in New York.
Last Tuesday, front-month May crude traded on the New York Mercantile Exchange hit an 18-month high USD 87.09, but prices tumbled in the next three days after midweek government data showed domestic crude stocks rising for the 10th week in a row last week.
For now, there could be a severe weakening of refining margins triggered primarily by a seasonal build in product inventories, Eagles said.
"Indeed, refining margins have already started to ease in Europe for less complex hydroskimming refineries, and arguably have reached a point where run cuts should start to be considered," he said.
At the same time, the strengthening of sweet/sour crude spreads has also favoured complex refiners, many of whom have been running well below capacity for the past year, he added.
With all these developments, Eagles said investors should stay long on crude and buy on dips, looking for the USD 90 on WTI.
"Expect the contango to widen for the rest of April, and then look to put on the curve flattening trade again," he noted.
"Gasoline should outperform heating oil and we would expect sweet/sour spreads to narrow again," he said.
Contango is a pricing situation in which futures prices get progressively higher as maturities lengthen, resulting in negative spreads as contracts go farther out.
As for OPEC, a Reuters survey at the end of March showed that total crude oil supply from the group rose in March as an increase in Nigerian output overshadowed a dip in Iraq, as members with agreed production targets reduced compliance to just 50 percent.
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