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  Why Oil prices are rising

 

 

Oil prices are rising today as a result of optimism for a coming demand uptick in key economies such as the US, China and the UK, and also assisted by a weak dollar, according to Rystad Energy comments

Nevertheless the back to back gains pose a risk amid the worsening Covid-19 situation in India.

Oil prices are rising further for yet another day and it appears like a mini rally fueled by increasing optimism over an expected uptick in oil demand in some of the world’s key economies.

Summer season is a synonym for driving season and drivers in the US, China and the UK are about to start consuming more fuel, a development the market believes will make up for India’s Covid-19 downturn.

A weaker US dollar, a result of Fed policy and Biden’s spending plan, is also helping prices, making oil cheaper to buy internationally.

 Active vehicles on the road in the US, approximately 185 million units, will definitely help US gasoline demand, which is already above August 2020-levels, closing in on the 9 million bpd mark according to our real-time data, nearly 3.5 million bpd higher than during the trough in April 2020.

UK drivers have also turned to the roads and active vehicles are now back to March 2020-levels, a stark contrast to the almost 50% drop in New Delhi.

The net effect of the world’s recovery trains, although they travel at different speeds, is positive for the global oil demand recovery. The US and UK trains roar at close to full speed, Europe and China are accelerating coming from behind.

 Nevertheless, seeing daily back to back oil price increases, poses a clear risk for the market, as we may be seeing the start of a new price bubble, which could violently pop if India’s Covid-19 effect worsens.

Demand is already taking an extra hit in India – we estimate negative oil demand impacts of nearly 600,000 bpd this month and over 900,000 in May, and the estimates may even prove conservative as the current infection trend is grave indeed.

If Murphy’s law applies in India and we see a medical tragedy of unprecedented proportion, then the scale could tip that much for oil balances that supply surpluses would prompt a rapid price correction.

For the moment optimism is helping prices but every trader’s eyes are on India. The oil bulls are out again but it’s doubtful that they are having a confident and calm sleep.

Bjornar Tonhaugen, Head of Oil Markets

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