Oil Holds Gains Despite Fears of COVID-19 Resurgence

OPEC, allies will meet this week to assess recent production cutbacks.

June 18, 2020

ALEXANDRIA, Va.—Fears of a second wave of COVID-19 in China, the world’s biggest crude importer, are casting a shadow over the struggling oil market, Bloomberg reports.

On Tuesday, Beijing announced that schools would shut down because of the risk of new COVID-19 infections. Insiders fear that another major outbreak would jeopardize the recovery in oil prices over the past two months, and the news capped an early rally fueled by a record jump in U.S. retail sales.

“China’s shuttering of Beijing’s schools is a significant setback to the country’s recovery from the COVID-19 virus, and it could be a real blow to the petroleum demand recovery outlook, which had been improving,” said John Kilduff, a partner at Again Capital LLC, an investment advisory firm. Technical indicators suggest the rally may fade. Brent crude’s 14-day Relative Strength Index is nearing 70 once again, indicating that it’s overbought.

The market received a boost earlier by a report that the Trump Administration is preparing a nearly $1 trillion infrastructure proposal to help support the world’s biggest economy. The S&P 500 rallied, with energy, health care and materials leading all 11 industry sectors higher. While oil has rebounded since April, the rally fizzled last week over fears of a second coronavirus wave. Yet, physical crude markets have continued to strengthen, with New York and Houston diesel climbing again on Tuesday.

According to the International Energy Agency, global oil demand will rebound next year, although it may take a couple of years to recover to pre-crisis levels. Meanwhile, shale production is still in retreat, and the Energy Information Administration predicts it will fall again next month. Still, the American Petroleum Institute reported that U.S. crude stockpiles rose 3.86 million barrels last week. Gasoline inventories added 4.27 million.

According to traders and analysts, Saudi oil exports to the U.S. could drop this month to the lowest level in 35 years, which would help the market re-balance. OPEC and its allies have agreed to maintain production cutbacks amounting to about 10% of global supply through next month and will meet this week to assess their impact. The oil minister from the United Arab Emirates believes that oil-production limits adopted by OPEC+ will soon bring prices back to “normal.”

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