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Oil gains trimmed as market gets rationalised

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Oilfield Technology,

Oil prices fell on Thursday, trimming excess gains as the impact of increasing Covid-19 infections to oil demand sinks in.

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

"Traders can’t be ignoring bearish pandemic signals forever. The Saudi cuts are priced in since last week, even a bit more than was reasonable under market conditions, and a rationalisation of prices was overdue.

US crude stockpiles are falling, but this was expected, as the market knows Saudi shipments have stagnated.

Gains from Saudi Arabia’s decision to cut its output by a further 1 million bpd had gone through the roof and although a price increase was justified, excesses needed to be corrected.

Seeing Covid-19 infections rise in China by the largest margins in a long time is alarming for the market and, combined with strict ongoing lockdowns in Europe, may affect oil demand much more than initially anticipated in the first quarter of 2021.

Vaccination campaigns may be under way but until big words are turned into actions and large parts of the global population are immunised, it will take a while until demand benefits.

The truth is that the market is optimistic, but this optimism leads it to hanging on bullish signals to a larger extent than it should.

The multi-month depression period of most of 2020 changed how the market normally behaves, as traders are hungrier for positive news and when they get hold of some, they initially overlook bearish fundamentals more than they should. And that causes price corrections within days.

What the market will be focusing more going forward is real-time road traffic data, they are a very good indicator of how Covid-19 affects oil demand and how a rise in infections translates to less transport.

China’s infections grow further and expand to more oil-hungry regions in the country, there is a downside risk for demand which can land a blow to oil prices in coming weeks, depending on government policies to counter the clusters.

Looking at the bigger picture, the 50 dollar floor is not in danger as we see it, there are solid reasons for oil prices to remain healthy. Gains above that level though will be fluctuating based on infection numbers and demand signals.

A lot of the global oil demand is also counting on aviation and, amid the new travel status quo, some tend to forget that it will take a normalisation of that industry too, to see the market recovering to its pre-Covid-19 glory, a mountainous task."

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Upstream news Oil price news Oil & gas news