Early Monday morning, Brent Oil dropped to $37.24 as traders feared the second wave of the pandemic. This dip was significant compared to where prices were last week Monday ($43). Oversupply Concerns, sluggish demand, and a spike in Coronavirus cases were responsible for the sell-off.
As seen in the diagram above, a massive sell-off occurred after the weekend of the OPEC meeting on the backdrop of Saudi Arabia’s reaction to extending cuts further to August. With demand sluggish, refiners’ margins, and demand for jet fuel still struggling, Oil prices fell massively last week. It represented the worst week for Oil after its back to back rallies of previous weeks.
Little wonder, the Group Managing Director of Nigeria National Petroleum Corporation, Mele Kyari labelled the high rise to $43 as “cosmetic.” In his words,
“The recent drive we have seen in the price of crude is largely driven by sentiments than demand because we have not seen the significant rise in the demand. There is no 100% conformity with the cut, and that means that the volume is still there. The price jump appears cosmetic to me, and if we don’t contain the supply, we could slide to the early March price level.”
Cosmetic is just the right word. The virus has not been eliminated. A lot of other geopolitical issues have masked it or instead made people sweep COVID-19 under the carpet. But it still looms in the air. The pandemic is still at large. Countries have eased lockdown for the sake of the economy and not because the virus has been largely controlled. This imbroglio explains why at the tail end of last week, there was a massive sell-off in Wall Street and in the Oil markets as fears gripped traders on the second wave of pandemic-hitting cities.
Reports also show an increase in cases in Beijing and towns in the United States of America. It was reported that one of China’s most extensive supply centres for fruits and vegetables had been shut down last weekend after scores of people working in and with market-tested positive for COVID-19. In the United States, the Federal Reserve warned about the detrimental damage the virus would have on the economy and showed sharp increases in cases, especially in Florida.
If cases soar in China and the United States, then the global economy is in for a cataclysmic shock. China is the leading light; the Oil markets look up to. If China shows signs of inability to contain the virus, then Oil would not find the support to spur on. Oil cannot handle another wave of Coronavirus. The recovery in China’s economy is not as fast as perceived weeks ago. Albeit the significant improvement in factory output, consumer spending, and investments, the recovery needs more push, and a second coming of the virus is not one of it.
With the U.S. Food and Drug Administration (FDA) revoking the emergency use authorization for Chloroquine and Hydroxychloroquine, and vaccines still a far-away panacea, COVID-19 would even limit demand more which is needed for the recovery of oil prices. Oil can certainly not afford another wave.
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