By Adedapo Adesanya
For the first time in six weeks, major oil benchmark closed last week facing south as a result of worries about rising crude inventories and a second wave of coronavirus cases.
Losing almost 11 percent in total last week, Brent crude oil, which hit $43 per barrel, finished at $38.73, down $3.57 or 9.22 percent, while the United States West Texas Intermediate (WTI) crude oil settled at $36.51 after going down by $3.29 or 8.27 percent.
Although the markets started out strong at the beginning of week on the back of the agreement of the Organisation of the Petroleum Exporting Countries (OPEC) to extend its output cuts. However, throughout the week, traders started to question demand, dampening the potentially bullish impact of the supply cut extension.
Also, among the major concerns were a gloomy outlook for the economy by the US Federal Reserve, worries over a surge in new COVID-19 cases and rising US supply which rose more than expected as data from the Energy Information Administration (EIA) revealed.
The US crude inventories rose unexpectedly by 5.7 million barrels in the week to June 5 to 538.1 million barrels – a record – as imports were boosted by the arrival of supplies bought by refiners when Saudi Arabia flooded the market with cheap oil in March and April, the EIA data showed.
The Federal Reserves economic outlook also remains bleak in the face of current global events. The agency said the US economy will shrink by 6.5 percent this year.
The US economy shrank by 5 percent in the first quarter of 2020, more than an advance estimate of a 4.8 percent contraction and ending the longest period of expansion in the country’s history.
It is the biggest drop in GDP since the last quarter of 2008 as the Covid-19 pandemic forced several states to impose lockdown measures in mid-March, throwing millions of people out of work, and affected basic needs.
Also last week, concerns over a surge in coronavirus cases raised the prospect of a second wave of the COVID-19 outbreak, hitting demand in the world’s top consumers of crude and fuel.
These factors overcame the extension of record oil production cut until the end of July that were meant to help stabilise prices. This points to the fact that traders are now more interested in the demand side of things than the supply end.
Looking forward this week, the rise in coronavirus cases and a possible second wave of infections is going to be the main price driver over the near-term.
The industry has a major supply-demand imbalance problem and as coronavirus cases rise, demand destruction worries will likely be the biggest influence on prices.
So far into the opening of the market, Brent crude is down 1.53 percent to $38.14 per barrel, while WTI crude is down 2.62 percent to $35.62 per barrel.
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