Oil falls on fears of second wave of Covid-19

"During the last month, oil prices were moving mostly based on supply signals, subconsciously ignoring the very real possibility of a coronavirus’ second wave.

Now, amid a spike in new confirmed cases in the US and Asia, the thought has started sinking in for many traders: ‘hey, Covid-19 is not really gone, what happens now with demand?’

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.

If we avoid a second round of material lockdowns on this side of the year, oil prices will be aligned to the rate that OPEC+ stick to their curtailment promises.

US oil production is about to turn a corner. That’s not observable through the continued slide shown in the US rig count, which we calculate has hit the lowest level in more than a decade.

However, we believe there will be a gradual reactivation of shut-in production which will be sufficient in the coming months for US production to stabilise and grow from its current levels.

Thereafter, it’s all about the balancing act of how many new wells operators will afford and choose to complete works in the pipeline.

We believe the balancing point for when new activity will be higher than the level to offset the decline in producing wells, happens sometime early 2021.

At that time, US shale oil production would be back on a more sustained growth path again as we are soon exiting the steepest activity collapse in the young history of US shale.

However, oil prices need to stay afloat at current levels and slightly above for this to come true. A second wave would derail those plans, along with many other plans globally as talks of a US economic V-shaped recovery is taking shape.

Overall, with oil supply flowing in a more or less expected path, demand will now be the key price mover. As a trader you can’t see the number of new infections rising in key markets and ignore it. You price in the risk. And the risk calculator now shows that we are much closer to a second boom of the epidemic, and that can’t be but bad news for road traffic and industrial activity."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/15062020/oil-falls-on-fears-of-second-wave-of-covid-19/