By Adedapo Adesanya
Oil prices marked another week of bullish return last week largely supported by data from the United States government which showed a drop in inventories.
However, the market edged lower, later on, giving up some of the week’s gains. Prices were capped by doubts about demand recovery due to the COVID-19 pandemic and rising supply.
This week, the ongoing uncertainty around demand caused by the COVID-19 pandemic and the possibility of higher global output could keep a cap on prices.
The Energy Information Administration (EIA) reported that US crude oil, gasoline and distillate inventories fell last week as crude production dropped sharply and refiners ramped up production. The most supportive news in the EIA report was the drop in US crude output to 10.7 million barrels per day from 11 million barrels per day in the previous week.
This helped to lift the market but the uncertainty surrounding the market especially when world oil demand will fall more steeply in 2020 than previously forecast due to the coronavirus as shown by two credible sources, which in addition showed that there are doubts about next year’s recovery.
The Organisation of the Petroleum Exporting Countries (OPEC) forecast noted that the global oil demand will tumble by 9.06 million barrels per day more than the 8.95 million barrels a day decline expected a month ago.
A day after, the Paris based International Energy Agency (IEA) also lowered its global oil forecasts for the first time in several months as the number of COVID-19 infections remains high and amid ongoing weakness in the aviation sector.
The IEA said it now sees global oil demand for 2020 at 91.1 million barrels per day reflecting a fall of 8.1 million barrels per day year-on-year. The revised forecast is 140,000 barrels daily lower than the IEA’s previous projection.
Although there are no expectations for the oil futures to go below the $40 level, traders are having a hard time extending the rally because of lingering demand concerns. This is happening despite production cuts in the US but as OPEC+ gradually raises output, this means an increase in global supply.
The inability of Congress to reach an agreement on additional stimulus measures could weigh on prices this week because the news has the potential to negatively affect demand. US policymakers are not expected to revisit the issue until after September 7 when they return from their summer recess. An emergency meeting could be called but as at the time of this report, it has not been discussed.
Economic data last week was supportive for crude oil, but the numbers from July reflected an economy that was being supported by government aid. The longer the economy goes without additional stimulus, the worse the numbers could be for August. This concern could weigh on demand and prices this week.
As at now, prices are higher, lifted by China’s plans to ship in large volumes of US crude in August and September, outweighing the major concerns.
At the time of filing this report, Brent crude rose 21 cents or 0.5 per cent to $45.01 a barrel while the US West Texas Intermediate (WTI) crude was up 27 cents or 0.6 per cent to $42.28 a barrel.
Modupe Gbadeyanka