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Oil falls on market pessimism and Covid-19 persistence

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Oilfield Technology,

Oil prices declined on Monday as Covid-19 infections continue to increase and on key market participants’ pessimism.

Paola Rodriguez-Masiu, Rystad Energy's Senior Oil Markets Analyst, has commented on the decline:

"The week started on a low note for oil as Covid-19 infections which continue to rise are bringing back restrictions that threaten oil usage for transport. Meanwhile, the bearish sentiment is reinforced by market pessimism that oil demand – and prices – will take a long time to recover.

The world’s biggest independent oil trader and Russia’s energy ministry are seeing a patchy path towards recovery, and this is weighting on prices today.

Vitol Group sees little support for increasing oil prices going into the fourth quarter, while Minister Alexander Novak doesn’t expect a fast recovery and asserted on Sunday that “it will take quite a while before the pre-crisis levels can be reached.”

The demand side of the equation will continue to be under threat during the fourth quarter of the year, with Covid-19 cases rising at an alarming rate, notably in Europe, which has already imposed new restrictions to curve down the number of cases.

The supply side is also ringing the bear’s alarms, with Libya’s output expected to nearly triple to about 260 000 bpd by the first week of October as AGOCO, Sirte Oil, and Akakus Oil fields partially restart.

Libya’s oil output, which is exempted from OPEC+ supply cuts, is seen rising following a reported peace treaty between the LNA and GNA. Nevertheless, GNA’s officials denied signing any such deal, so, if negotiations once again break down, the ramp-up in supply could be short-lived.

Whatever the level that Libya’s output may reach, this extra production is not something the market had priced in during this pandemic and nor was it something it was hoping for.

Adding to the negative pressure on oil prices this morning is news of China’s crude inventories continuing rising despite imports slowing down. China has supported the recover so far and this development is alarming.

The high level of stockpiles in China in addition to independent oil refineries exhausting their crude purchase quotas for this year, will extend the slowdown in crude purchases until year-end.

With fewer than 100 days to go in 2020, both our liquids and crude balances suggest a return to oversupply (implied builds) in October and November. Our crude balances look increasingly worrying as refiners are facing enormous pressure from high inventories and depressed margins.

Despite the pick-up in total liquids demand, margins have not managed to see significant gains as refiners struggle to keep up with the excess in supply in jet fuel and diesel. As jet fuel is single-handedly dragging oil demand down by nearly 4 million bpd compared to last year, the situation is so dire that the excess of supply is reportedly being used to produce low-sulfur bunker fuels for the maritime industry."

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