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Oil falls on stocks uncertainty, geopolitical and health concerns

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Oilfield Technology,

Oil prices fell this morning as traders priced in concerns over the future of crude stocks, geopolitical tensions and fears over how Covid-19 will progress.

Bjornar Tonhaugen, Rystad Energy's Head of Oil Markets, has commented on the morning's events:

"This is the last trading day for the Brent July futures contract, which seems to ease quietly into its recent comfort zone range of around US$35 a barrel.

The balance scale of incrementally bullish vs. bearish news flow for the value of crude shifted towards the bears over the past 24 hours, but only marginally. The global reaction to China’s move to propose new security laws for Hong Kong continues to increase, while there’s a score of new Covid-19 cases in South Korea. Meanwhile, reported fatalities in the US climbed to a week-high yesterday, spurring concerns about the oil demand recovery due to the increased risk of a second wave of restrictions as countries rush to reopen.

The physical crude market is though slowly healing, and the market is somewhat shrugging off the surprisingly huge build in the US crude stocks last week reported yesterday by the EIA (7.9 million barrels). Not that it didn’t raise eyebrows and that nails weren’t bitten though.

The surprisingly high stock build was mostly caused by US refiners taking in a larger share of cargoes that have waited to discharge due to the oversupply situation over the past few weeks, leading to a jump in reported imports for the week both in the Gulf Coast and West Coast.

Barring any major shock in global politics, the recovery in the crude markets seem to be ensured by the simultaneous recovery in daily road fuel demand indicators and gradual increase in refinery demand, while Russia and Saudi Arabia have also agreed to coordinate closely on supply management as we get closer to the 9 June OPEC+ meeting.

Today, uncertainty over the future direction of crude storage and concern over geopolitical tensions and future renewed restrictions are good enough reasons for lower prices. Yet, just a few weeks ago a market reaction would have been much larger, which shows that we have now entered a period of normality in trading, with huge price swings being a thing of the past for now. Supply developments and other geopolitical tensions that could affect demand are priced in, but not at exaggerated margins.

Big swings could only return if Covid-19 restrictions do with a second wave.

Now, waiting for the next OPEC+ meeting, the market is also comfortable in a relative calmness. But the outcome of the meeting itself could create a very stable, or a very different scenario for supply and demand balances. Nothing is for granted in such meetings, OPEC+ has proved that this year."

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