Oil Price Down, Virus Still Persistent Leading to Oversupply

With the growing number of infection cases worldwide, more locations are considering tightening and adopting new containment mechanisms to curb the spread of the virus.

Such an update is bearish for the oil price, as this means lukewarm demand prospects and a looming oversupply.

California is the latest US state to announce its desire to renew mobility restrictions. This comes after garnering 30,000 daily cases on Sunday. 

Adding an insult to the injury, the hospitalization rate remains high.

In the latest commodity charts, the Brent crude futures edged down by 20 cents per barrel after a 0.4% fall. Still, the European benchmark is trading steady at $49.05 per barrel.

Following the path of its counterpart, the West Texas Intermediate futures contract fell by 20 cents. It currently trades at $46.06 per barrel.

Crude oil shed off the gains made in prior sessions due to the record-level infections in Los Angeles county.

The new restrictions in California will primarily affect bars, salons, and other entertainment and wellness hubs.

The same businesses had already received the painful blow of the burden during the early onset of the virus.

Consequently, the South Korean government raised its alert level following an uptick in Covid-19 cases.

Adding a further worry, Southern Germany announced its plan to impose a tougher lockdown starting tomorrow. The lockdown will last through the first week of the new year.

In a short-term analysis, experts in the field noted that the continued growth in daily infections would result in downward pressure on the oil price.

On the other hand, once the vaccine starts to roll out and supply could meet demand at the closest level, a strong surge will be expected.

Organization of the Petroleum Exporting Countries’ Decision

The increased lockdowns ignite fears of a looming oversupply. An update from the Organization of the Petroleum Exporting Countries further adds to the concern.

Recently, the association’s members agreed to lower the production cuts to 7.2 million barrels per day from the current figure of 7.7 million barrels per day.

The new mechanism is expected to enter into force starting January next year and will be maintained until further notice.

The decision came despite the member states’ varied stance on whether to keep or ramp up production about the maintenance of oil price to its sustainable level.

According to reports, Iran’s plan to increase production in the coming months will further add to the already worrisome situation.