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Oil dips as rally decelerates and Covid-19 worries sink in

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Oilfield Technology,

Oil prices lost ground this morning, as traders corrected last week’s exuberant gains, amid worries that Covid-19 will not let demand recover as quickly as hoped.

Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the price fall:

"Oil prices have been rallying with foot full on the acceleration pedal, it is only natural that the market would at some point sober up and correct the excess gains.

This morning traders faced a reality check. Market participants have been questioning how on earth equities could trade back at such highs just two months after the deepest economic contraction since the 1930s.

Crude oil prices took a 7% nosedive yesterday in the global reality reckoning - something we warned was bound to happen as the crude price rally had gotten ahead of itself in the short term.

This morning, Brent and WTI are trading down again. Here’s what is going on: It started with the Fed’s grim economic outlook for the US and the surprisingly large US crude stock build on Wednesday. Furthermore, alarming new cases and fatalities of Covid-19 in South America, South Asia and certain large US states are adding to the markets’ concern of a second wave. Persistently high US unemployment claims added more fuel to the dumpster fire yesterday. This morning, further economic realities were revealed, as UK GDP contracted by more than 20% in April, with the OECD expecting the deepest economic contraction for the UK in more than 300 years.

Yes oil demand and supply have come to a balance now and the scale will clearly turn on the demand side soon, but is this enough to benefit prices constantly? The market prices in future dangers and a grim economic outlook, combined with a very real second Covid-19 wave scenario, are good reasons to slow down the price recovery. Because essentially a strong economy and the departure of Covid-19 from our lives are the reasons more fuel will be needed again.

It’s not all bad. We do believe oil prices will be able to stabilise again above US$40 in the third quarter, if Covid-19 does not return for a second visit, as fundamentals point towards supply deficits.

Deeper-than-expected supply cuts by OPEC+ already in May now extended through July, coupled with steadily improving day-by-day trends for road fuels demand since the early April nadir, plus the resumption of crude buying (especially from Chinese independent refiners) have brought the crude market back into balance in June. Furthermore, we see sizeable stock draws commencing in July with a 3.3 million supply deficit for the month.

The supply deficit will extend through year-end as long as OPEC+ stick to their guns and adhere to the latest deal.

Looking at the bigger picture, the oil price is artificially supported by the removal of 10 million bpd of crude and condensate supply by OPEC+ which is leaving the world with a record-high 15 million bpd of spare oil production capacity in June. The oil price recovery path from here is therefore fragile and hinges not only upon avoiding a derailing of the demand recovery, but also OPEC+ coherence which will depend on Riyadh’s and Moscow’s patience with sub-compliers through the third quarter of 2020."

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