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Oil gains on market tightness but gains are at risk as Covid-19 infections rise

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Oilfield Technology,

Oil prices rose on Wednesday, boosted by expectations that Saudi Arabia’s extra cuts will create a tight market, but there is a downside Covid-19 risk as infections rise.

Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the day's developments:

"The oil market is trying to find the right sweet spot again, after Saudi Arabia brought all that extra sugar last week.

Prices are up again as traders are still weighing the consequences of a tighter oil market from February.

When traders see crude stocks already declining by great amounts now, then they can dream of even better days with a million of fewer barrels per day.

The sentiment was up today as initial projections from the API institute showed stocks declining by more what the market believed likely.

A decline in Saudi shipments to the US has a lot to do with the declining stocks, but the Saudi colours are all over what matters lately for the market.

Saudi Arabia is also tightening supplies to Asian refiners leaving them fighting over replacement barrels amid a cold-snap and then you easily have a rally on your hands – for now.

This rally has got legs, but the real question is when will it run out of steam.

On the technical side, the market is also looking for clues on how severe the refinery “maintenance season” will prove to be in the coming months. Supply may be tighter, but so will demand for crude by refiners.

What comes as a surprise is that prices seem to ignore worrying news from the Covid-19 front.

Daily infections are breaking records in the US and Tuesday is a day the country will like to forget as the virus’ fatalities took more than 4000 lives.

Normally, having so strict lockdowns in Europe and a rise in infections in the US and China, the market should be worrying.

As the record infections in the US sink in later today when the market opens, traders will realise demand in the country will not be unaffected going forward. We may see some of the early gains trimmed as the trading day moves from east to west.

Last but not least, the market will look for confirmation in the DOE weekly inventory numbers due at 4.30 pm CET today for a crude draw and product stocks build, but a surprise there can change today’s price direction."

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