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Oil prices extend losses on Asian Covid-19 infections and US crude stocks build

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Oilfield Technology,

Oil prices extended their losses on Thursday as the market priced in concerns over increasing Covid-19 infections in Asia and a surprise US crude stocks build.

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

"The market realised that a global come-back in oil demand cannot come without a come-back of the world’s largest economies.

It is not enough to see the US and China dealing well with the pandemic. For oil prices to build up again, it will take global signs of recovery, and such indications are now scarce in key Asian countries.

Oil traders realised that India is diving deeper and deeper into a major crisis with infections setting new records every day and as we learned over the last year and a half, things may get worse before they get better.

India’s economy is a major one and even though the government indicated that it will try to shield industrial and financial activity, it could be wishful thinking under the current infection rates.

Traders this week applied a major downgrade to oil prices as a result of the increasing pessimism over India’s way of dealing with Covid-19.

But India is the big tree in the forest. Looking behind the Indian shock, other major Asian economies – such as Japan – are also in a worrying state, with more restrictions likely.

The recovery of oil demand in the region, excluding China, is slowing down and the market is adjusting prices. It will take a change of fortune in Asia, and soon, to see prices quickly going up again.

The market could also not hold on to its earlier price levels as US stocks surprised traders, building up last week, rather than declining – which was widely expected in the market.

As the US economy speeds up and refineries enter their full processing mode after the spring maintenance, more draws are expected from storages, correcting the bigger inventory picture.

Even though prices are now slowing down, as vaccination campaigns progress later in the year – when struggling Asian economies are also expected to start recovering – a new price uptick can be expected.

Brent prices could jump by a few dollars in the third quarter of 2021, because of tighter balances owing predominantly to high crude runs against a moderate US supply forecast.

Balances in July and August now look very bullish, on the back of increased crude runs forecasted in the US this summer.

Unless OPEC+ renegotiates higher its target production for the second part of 2021, crude draws could average a whopping 2.8 million bpd in the third quarter with an August super draw of more than 4 million bpd.

In other words, OPEC+ can orchestrate a spike in crude prices, knowingly or unknowingly, unless August targets are revised higher. If not, then we warn of the risk of a short-term price overshoot in the months ahead.

Possible policy changes could be crucial for oil balances, so the market’s attention will be all over the next OPEC+ meeting next week."

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