Crude oil price started the week on the seesaw, with headwinds and tailwinds battling for control in a persistently unstable market situation. A spike in Covid-19 infections on the one hand and returning optimism on the other pushed oil up and down. This volatility is likely to continue over the next few days as data about both forces continues to accumulate.
On the headwind side, global data showed that Covid-19 cases worldwide had risen to over 8 million but what was perhaps more worrying for oil traders were the reports suggesting that several U.S. states reported spikes in new infections, prompting talk about a possible second wave of the pandemic, which could lead to a total collapse of oil markets.
On top of these reports, BP chose this Monday to update on its long-term price projects and asset valuation, saying it now expected Brent crude to average $55 a barrel between 2021 and 2050. But what may have come as a shock to some, the supermajor also said it would take a hefty writeoff on its assets and exploration intangibles, to the tune of $26-21 billion on a pre-tax basis, in its second-quarter financial report.
While this was all bearish for oil, there were some bullish factors at play, too. One of these was the fact that global oil inventories have started to drain, and as demand for fuel recovered, this drain would accelerate. The other was optimism about OPEC+ cuts after media reported that Iraq, the notorious cartel laggard in production cut deals, had asked the foreign operators of its largest fields to increase the production caps they had already put in place in May.
“Even as the global markets are in the grips of a resurgence of risk aversion tied to new Covid outbreaks in China and the U.S., oil fundamentals are still moving in the right direction,” the head of commodity markets strategy at BNP Paribas, Harry Tchilinguirian, told Bloomberg.
“Renewed optimism that OPEC+ production cuts could remain in place if we see second wave concerns intensify have oil prices refusing to enter freefall,” Edward Moya, senior market analyst at OANDA, told Reuters. Related: IEA: The Energy Sector Will Never Be The Same Again
So, right now, the oil market is a battlefield for fears about the coronavirus and its effect on oil demand, which will undoubtedly be negative should those fears spark a slowdown in lifting the lockdowns, and expectations that supply will finally begin to shrink at a meaningful rate, which would support substantially higher prices.
Judging by the latest update about hedge fund oil buying, this time is yet to come. Reuters’ John Kemp reported in his regular weekly column that funds bought the equivalent of a modest 10 million barrels in the week to June 9, just a tad more than the 6 million barrels they bought the previous week. These compared withy an average weekly buying rate of 40 million barrels over the previous eight weeks, Kemp noted.
The situation could get even more polarized in the coming days and weeks, especially in the U.S. Despite draws, oil in global storage remained high in May, according to data from analytics firm OilX. Oil in floating storage has started to drain, but oil in onshore storage still rose in May. As of early June, total oil in onshore storage was above 4.5 billion barrels. Of this, some 1 billion barrels flowed into storage in the past couple of months and will take a lot longer to clear up.
Both Brent and WTI were trading down at the time of writing of this story, although any positive news will likely reverse the movement. The same goes for any negative news, chief among them the API crude oil inventory reports due out today, but also any reports of continued increases in new Covid-19 cases, with a particular focus on U.S. and Chinese data.
By Irina Slav for Oilprice.com
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Irina Slav
Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.
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