Oil price gains likely to halt over demand uncertainty, as US-China tension intensifies

Crude oil prices, which have been on a steady increase for 3 consecutive weeks, seem to be coming to an end primarily due to the rising tension between the United States and China, and caution over the prospect for a global recovery in oil demand.

This is compounded by the disclosure of the world’s second-largest economy, China, that it is uncertain about its GDP growth target for 2020 because of the coronavirus outbreak.

The Brent crude, now $34.60 per barrel, sold for $36.41 about 4 days ago. The American WTI, which sells for $32.84 per barrel, sold for almost $34 per barrel a few days ago. Also, the Bonny light crude, selling for $33.01 per barrel, sold for $34.46 per barrel about 4 days ago.

With China’s oil demand climbing back to about 13 million barrels per day, which is about 90% of the pre-pandemic level, oil traders are holding out hopes of a quick rebound elsewhere with the global easing of lockdown.

The output cut by OPEC+ and top oil-producing countries and more than 2.2 million barrels per day production shut in by U.S, have meant that the supply side of the equation is doing just fine.

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However, the rising tension between the US and China is weighing on the global markets. For political reasons, the leadership of each country is blaming the other for the coronavirus pandemic. The Chinese Foreign Minister, Wang Yi, warned that the US leaders were potentially pushing towards a new cold war, which is having a negative impact on investors.

Although the US crude inventories fell by 5.6 million barrels last week, the gasoline stocks actually increased.

According to Commerzbank, “After weeks of rising, US gasoline demand was down again for the first time. Demand for oil products also remains subdued elsewhere. With concerns on the demand side remaining we regard the latest price rally on the oil market to be excessive.”

Despite assurances from the Trump administration’s officials, a V-shaped recovery is extremely unlikely.

There also appears to be a belief that the US and other countries will not avoid the second wave of infections after reopening the economy.)

According to Rystad Energy, “A second wave is not such a remote possibility and a new round of lockdowns could send oil prices back to much lower levels very quickly and the markets know it. Therefore, lower prices this morning are not a surprise and they are not necessarily the result of a market event, they are rather a correction of the consecutive boosts that oil has seen over the last days.”

The data firm still believes that oil prices will stabilize at the $30-$35 range with the potential to be $40 later in the year, if and when demand improves and approaches the pre-covid-19 levels.

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