U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching lower on Tuesday, while rangebound for a third session into a technical retracement area. The price action indicates investor indecision and impending volatility despite worries about further demand loss due to rising coronavirus cases and the potential for increasing supply.
Rising COVID-19 Cases Expected to Weigh on Demand
The story that continues to dominate the trade and keep a lid on prices is worries a resurgence of coronavirus cases globally is stifling a promising recovery in fuel demand, while growing output from Libya adds to plentiful supply.
The threat of another wave of coronavirus cases is certainly painting a bleak picture for demand. There doesn’t appear to be an end in sight since measures such as social distancing and mask-wearing are being practiced in some areas and not in others. The outlook for a successful vaccine is also gloomy. It may be just a matter of time before another wave of demand destruction hits.
COVID-19 cases topped 40 million on Monday, according to a Reuters tally, with a growing second wave in Europe and North America sparking new clampdowns.
Rising Output from Libya Another Major Concern
Rising output from Libya, which is operating outside the OPEC+ pact, was adding to oversupply concerns.
Libya is rapidly ramping up production after armed conflict shut almost all of the country’s output in January. Output form its biggest field, Sharara, which reopened on October 11, is now at around 150,000 bpd, or about half its capacity, two industry sources told Reuters.
OPEC+ Holds Key to Controlling New Supply Worries
A meeting on Monday of a ministerial panel of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, together called OPEC+, pledged to support the oil market as concerns grow over soaring infections.
For now OPEC+ is sticking with a deal to curb output by 7.7 million barrels per day (bpd) through December, and then shaving the cuts back to 5.8 million bpd in January.
The real question that needs to be answered is, will the oil market be able to absorb the around 2% of global supply that OPEC+ is expected to restart from January 1, 2021?
Oil demand is at about 92% of pre-pandemic levels, “but it’s too early to declare an end to the COVID-19 oil demand destruction era,” said Rystad Energy oil market analyst Louise Dickson.
We think the way of least resistance is down because we’re looking for demand to weaken and global supply to rise over the near-term. OPEC+ would have to change its mind and announce a reversal of its planned output increase from January, and a working vaccine would have to be implemented before we’d see a breakout to the upside of this current rangebound trade.