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Oil prices plunge as market corrects itself to meet Covid-19 reality

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Oilfield Technology,

Oil prices continued their free fall for a second day in a row as the market finally corrected itself, pricing in the full impact of a second wave of Covid-19.

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

"The moment would come at some point for the market to correct itself and this week is the week.

The pandemic’s second wave, which was expected to arrive at some point in the second part of 2020, is now fully manifesting itself. Record daily infection numbers are shocking Europe and the US and many nations with significant oil consumption such as Italy, Germany and France are going again on a lockdown mode.

The new lockdowns have since yesterday caused a carnage in the oil market, which continues this morning after the worst single-day sell-off since 8 September.

Oil demand will lose ground as a result of the new lockdowns, with road fuels taking a significant hit as transport will be curtailed to minimum again. Prices now naturally decline on this grim prospect.

The US election is across the corner but, even though the outcome will indeed affect markets, on the short term no significant changes are expected so the effect on prices from that side of the Atlantic is muted.

Today’s price drop is more about the near term risks in Europe and elsewhere. But the rise in cases in key US swing states will also have a negative impact on mobility through more cautious behaviour, regardless if additional measures are being imposed in those states.

We believe oil prices would have dropped much more if the market now believed we are in a new April-2020-full-lockdown situation, which we will probably avoid as governments aim at more targeted measures to protect their economies.

But we can easily see a 10% drop in Europe’s current 13 million bpd of oil consumption in November, which in itself could easily shave off more than 1 million bpd of oil demand.

The build in US crude inventories did not help to offset Covid-19’s negative impact.

Traders this week try to find positive news to hold onto but the market doesn’t offer any, and the OPEC+ current lifeboat deal now looks like it is not sufficient for the rescue.

For prices to recover a radical development from the supply side is needed and the market now hopes for just that. OPEC+ can clearly not ignore the new round of lockdowns in its next meeting and maintaining its current cut levels in 2021 is definitely on the agenda."

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