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Crude Oil Drops on Risk Aversion & Demand Outlook

Summary:
Prices declined today amid risk aversion caused by an unexpected surge of confirmed coronavirus cases in China. While the sharp increase looks to be just a result of a change in methods of collecting data, the resulting confusion and fear hurt riskier assets linked to economic growth. Crude was one such asset as demand for energy and fuel directly tied to how well the economy performs. And the impact of the virus will likely hurt the global economy. Talking about the impact of the virus, the International Energy Agency lowered its demand forecast for 2020. The agency said in its Monthly Oil Report for February: Global oil demand has been hit hard by the novel coronavirus (Covid-19) and the widespread shutdown of China’s economy. Demand is now expected to fall by 435 kb/d y-o-y in 1Q20,

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Prices declined today amid risk aversion caused by an unexpected surge of confirmed coronavirus cases in China. While the sharp increase looks to be just a result of a change in methods of collecting data, the resulting confusion and fear hurt riskier assets linked to economic growth. Crude was one such asset as demand for energy and fuel directly tied to how well the economy performs. And the impact of the virus will likely hurt the global economy.

Talking about the impact of the virus, the International Energy Agency lowered its demand forecast for 2020. The agency said in its Monthly Oil Report for February:

Global oil demand has been hit hard by the novel coronavirus (Covid-19) and the widespread shutdown of China’s economy. Demand is now expected to fall by 435 kb/d y-o-y in 1Q20, the first quarterly contraction in more than 10 years. We have cut our 2020 growth forecast by 365 kb/d to 825 kb/d, the lowest since 2011.

The Organization of Petroleum Exporting Countries lowered its demand outlook as well, saying in its Monthly Oil Market Report for February:

Oil demand growth in 2020 is revised down by 0.23 mb/d from the previous month’s assessment. With this, global oil demand is now forecast to grow by 0.99 mb/d and average 100.73 mb/d for 2020.

The OPEC confirmed that the reason for the downgrade was indeed the coronavirus in China:

The outbreak of the Coronavirus in China during 1H20 is the major factor behind this downward revision.

The worsening outlook for oil consumption prompted discussions that the OPEC and its allies should deepen their production cuts to buoy prices for crude. The problem is that Russia, the biggest non-OPEC producer, is not sure whether it is ready for deeper cuts. Without Russia joining, the result of potential cuts on oil prices will likely be significantly reduced.

Futures for delivery of WTI crude oil fell by $0.36 (0.7%) to $50.81 per barrel as of 13:57 GMT on NYMEX today. Brent crude for delivery in April tumbled by $0.61 (1.09%) to $55.18 per barrel on ICE.


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Vladimir Vyun
Vladimir is an online journalist with background in computer science and work experience in pension funds. He contributes news reports, fundamental analysis and sentiment forecasts to TopForexNews.com and CommodityBlog.com. His main specialization is the currencies of emerging economies and inter-market correlations with commodity and bond trading.

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