Why does oil remain frozen at $40?

Why does oil remain frozen at $40?

Oil prices saw some gains after a report from the Energy Information Administration. The EIA stated that crude inventories faced a huge drawdown on Wednesday. However, many analysts claim the bigger picture looks obscure because of economic and pandemic-related risks. 

Analysts from Standard Chartered, a British multinational bank, wrote in a note that upwards momentum has been hindered over the past month. They think that this is the result of the flattening of oil demand recovery and the darkening of economic prospects. The investment bank added that views on the oil market will come to a consensus in the second half of the year.  

Talks about V-shaped recovery now are rarely heard. This is what allowed Brent to rally beyond $40. Now, discussion among traders seems to be shifted to how much demand will disappoint and how much time will it take to normalise inventories. 

Now that talks about economic reopenings have exhausted the market, prices have been stuck at the same levels for a long time. WTI remains grounded at levels around $40, with Brent at a few dollars more. 


Coronavirus pandemic still appears to be a risk for growing oil demand

Standard Chartered analysts think that, amid the coronavirus pandemic and the negative outlook of the global economy, Brent being above $40 seems quite contradictory. 

However, the latest EIA report showed that US gasoline demand jumped last week. It climbed to 8.8 million barrels per day, the highest number in four months. This rise ended several weeks of decline, at least temporarily. 

In significant US states, such as Texas, Florida, and California, coronavirus infections have eased. ClearView Energy Partners, an independent research firm, thinks that this factor could be the reason for recovering demand. 

Still, the risks of the prospect of a second wave of the coronavirus pandemic remain. The total number of cases globally topped 17 million and the US is leading the world in this area. While the death toll globally reached 670,000, mortality cases in the US passed 150,000 on Wednesday. According to health experts, many states reopened businesses and public attractions too soon and it caused a resurgence in COVID-19 infections. Yet, Restrictions, travel limitations, and directives still vary from state to state. 

Because of the market sentiment shift from week to week, it is not clear that oil markets would be in a solid supply/demand deficit


Loosening OPEC+’s production cuts will harm the market

This week, Rystad Energy, an independent energy research company, warned that the loosening of oil production cuts by OPEC and its allies could lead to a renewed excess supply for the next four months. In terms of oil demand, the world is nowhere near out of the woods. 

The EIA data happened to be positive for the oil market. Still, the coronavirus infections in Europe rose unexpectedly. Rystad Energy pointed to the decline in road traffic in the region, as coronavirus cases rose. Today’s price gains could be canceled as soon as production exceeds demand. Rystad Energy thinks that this moment is around the corner. But, it will likely last for some time and traders will race to price it in.