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Home Markets Commodities

Oil price slump continues as second wave of COVID-19 may crush the oil market

Chike Olisah by Chike Olisah
June 16, 2020
in Commodities
Oil price slump continues as second wave of covid-19 may crush the oil marketOil falls over comments on U.S.-China trade deal being “over” 
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The slump in oil prices continued as fears for a second wave of the coronavirus disease could threaten demand recovery, outweigh the further output cuts by OPEC+ and top oil-producing countries, and more Federal Reserve support for the US economy. This is posing a renewed threat to the global economy.

A new outbreak of infections in Beijing over the weekend prompted a response from the Chinese government with another round of closure of schools, sports venues, malls, and supermarkets.

Across some U.S states including Arizona and Florida., infections are rising, even as Americans are reluctant to continue with mask-wearing and social distancing guidelines. However, unlike in March and April where the epicentre of the pandemic was New York, the new explosions of cases are more concentrated in the south. On Saturday, the U.S. reported almost 26,000 new cases, the highest in almost a month. This is adding to the nervousness that the worst is yet to come.

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Oil prices retreated further on Monday, with prices down more than 10% in less than a week.

READ MORE: Post COVID: FG releases new strategic policy for survival of oil sector

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The Brent crude now sells at $39.55 per barrel and the American WTI is selling at $36.90 per barrel.

According to the head of Oil Markets at Rystad Energy, Bjornar Tonhaugen, “Concerns that we may be seeing the beginning of a second wave of the pandemic are dominating trading floors this morning across the globe, from Beijing to Florida. Markets move in waves of fear and greed, and after greed has enjoyed a long joy ride, fear has started sprouting again.”

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These concerns are partly eased by evidence that OPEC+ members are complying with the extended output cuts with Saudi Arabia cutting supply terms to Asia and Iraq promising deeper cuts.

The oil market had a rebound from its record crash below zero in April as the OPEC+ and other top oil producers output cuts took effect. However, the rally appears to have ended last week with the second wave of infections and so the market may need to see the demand recovery push significantly higher.

The IMF is expected to cut its global economic forecast when it releases new figures on June 24. The Fund said in April that global GDP may contract by 3% this year.

READ MORE: Brent crude price fails to remain over $40, concerns over pledge cut strengthens

Meanwhile, the accumulation of oil in storage from the last few months is disturbing. China alone is set to add 440 million barrels to storage in the first six months of the year, according to IHS Markit, the largest increase by any country ever recorded. That buildup in China actually provided a boost to oil prices, offering a source of demand at the peak of the oil crisis. But it’s not clear that the rate of storage injection can continue.

This is compounded by the fact that the prices in the oil market may have rallied too far, to begin with, even before recent data shows an uptick in COVID-19 infections. The Commerzbank pointed out that oil markets had focused on only positive news such as U.S. shale production declines and OPEC+ output cuts while ignoring red flags. The coronavirus never went away and is now spreading to new areas as a country like Brazil recently moved into second place in terms of the number of total deaths from the virus.

According to Commerzbank, the outlook for the oil market is likely to become gloomier again due to the weaker economic data and concerns about a second wave of the COVID-19 pandemic.

 

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Tags: American WTIBeijingGlobal economyIMFoil pricesOPECOPEC+ output cuts

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