By Adedapo Adesanya
Oil prices may struggle to hold on to their five-month highs this week as fuel demand worries caused by the second wave of coronavirus infections outweigh any other factor that could lift the market.
Worldwide cases of COVID-19 reached 20 million on Monday and with the International Energy Agency (IEA) update to its oil demand forecast, demand is expected to suffer 7.9 million barrels per day decline this year. This compares with expectations of 8.9 million barrels per day demand contraction by the Organisation of the Petroleum Exporting Countries (OPEC).
The International Monetary Fund (IMF) in a report titled Global Imbalances and the COVID-19 Crisis also said it expects crude oil demand to record an 8 per cent decline this year. As a result, prices will be 41 per cent lower than they were last year on average.
Last week, steady declines in the US Dollar supported by the commodity because such an occurrence typically makes buying oil cheaper for holders of other currencies.
The price of oil was also supported on Tuesday and Wednesday by the two reports of a crude oil inventory draw in the United States.
The Energy Information Administration (EIA) reported on Wednesday that US crude oil inventories fell 7.4 million barrels during the week ending July 31. Analysts had expected an inventory decline of 3.267 million barrels for the week.
On Tuesday, the American Petroleum Institute (API) reported an inventory draw of 8.587 million barrels for the last week of July.
On the supply side, Iraq said on Friday it would cut its oil output by a further 400,000 barrels per day in August and September to compensate for its overproduction in the past three months.
The move would help it comply with its share of cuts by OPEC and their allies, together called OPEC+. The sharper cut will take Iraq’s total reduction to 1.25 million barrels per day this month and next.
The Saudi and Iraqi energy ministers said in a joint statement that OPEC+ efforts would improve the stability of global oil markets, accelerate its balancing and send positive signals to the markets.
Market analysts noted that Saudi Arabia and Iraq forging better relationships over the oil deal are excellent for the compliance outlook but while this might help the market hold on for a little while, it has little long-term advantage as Iraq has been known to be a laggard.
Investors will also hope that the halt in talks between US Democrats and the White House on a new support package for cash-strapped U.S. states hit by the coronavirus pandemic continues as a delay in reaching a deal weighed on the market.
US House Speaker, Ms Nancy Pelosi and Treasury Secretary, Mr Steven Mnuchin both said they were willing to restart talks on a deal to cover the rest of 2020.
The market, however, resumed this morning pointing upward, supported by Saudi optimism on Asian demand and on Iraq’s pledge to deepen supply cuts.
As at the time of this report, Brent Crude was up 43 cents to $44.85 per barrel, while the West Texas Intermediate (WTI) was up by 61 cents at $41.83 per barrel.
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