Louise Dickson
Oil prices fell on Wednesday on India’s Covid-19 infections, a forecasted US stocks build and an anti-OPEC bill that was passed by a US House panel.
Oil prices are declining today as a trio of bearish developments forced traders to ignore a partial but bullish Libyan force majeure on exports.
A forecasted build of in US crude inventories, a bill passed by a US House panel to challenge OPEC’s work to protect oil prices, and a continuous rise of Covid-19 infections in India and other countries weighed on prices.
Rising US crude stocks are always a bearish variable that adds pressure on oil prices and, if confirmed, last week’s added 436,000 barrels comes as a surprised for the market, that hoped for better news amid the projected US economy comeback.
The US held another surprise yesterday for oil. A US House panel passed a bill that challenges OPEC’s cooperation to cut production and keep prices high. Traders reacted to it and cut prices in yesterday’s late trading, but it doubtful that the bill will be considered at a later stage.
Such bills are usually unsuccessful when they appear in Congress and not uncommon at times of OPEC price protectionism, but they are always enough to raise some eyebrows and the market priced in the challenge.
In India, grim Covid-19 records in both deaths and infections are ringing alarm bells on trader floors. India is a huge consumer of oil and the possibility of consumption disruptions there amid a possible economy slowdown affects prices.
However, India’s announcement not to resort to a full national lockdown and instead prioritize the economy is keeping losses moderate.
In just the past few days, we have seen India’s road traffic index jump up from about 88% to nearly 91%, a sign that the country is trying to return to “normal” despite the unprecedented surge in cases.
This is technically “good” news for oil demand, refineries, and prices, but the health burden may soon catch up and force Indian authorities to respond more harshly to the crisis so there is some further downside for oil prices.
China is also helping market sentiment today. Positive factory and road traffic data from China have boosted oil demand morale, providing a price pillow.
Rystad Energy’s RealTime data shows that Chinese road traffic levels are almost back to normal – with about 94% activity registered this week compared to 2019 levels for the same week in April.
Before the pandemic hit, Chinese road demand accounted for about 7% of global products consumption, so recovery in this region and sector are a key barometer to monitor.
Nevertheless, oil demand fears still rightfully persist. With the worldwide Covid-19 case count at an all-time high this month, many countries are again resorting to a “do not travel” policies, which will bruise international aviation demand in the short term.
Before the pandemic, aviation required about 8 million bpd of oil products, and while significant recovery has already been made since the nadir in April 2020, demand today, a year later, is still hobbled at about 4.5 million bpd as a majority of international travel is still discouraged by quarantine measures.
Last but not least, traders should continue to closely watch Libya, where developments are still uncertain.
A restart of exports from Hariga and a resolution to the budget dispute could be a bearish sign for prices. But any further escalation and closure of other facilities will add a premium.
Before the force-majeure was announced, the Sarir and Messla fields were set to produce 215,000 bpd of oil in April. The closed port affects light sweet crude, so the outages will provide upward support to Brent prices and other light sweet grades trading
Louise Dickson writes for Rystard Energy
