Oil Loses Ground Amid Worries About Recovery

Oil Video 21.08.20.

Contradictory PMI Data Puts Pressure On Oil

Oil found itself under pressure after the release of disappointing Euro Area PMI reports. Both Manufacturing PMI and Services PMI declined compared to July levels, and the decline of the Services PMI was especially significant as the continued spread of coronavirus put additional pressure on the hard-beaten sector.

Not surprisingly, oil traders interpreted the data as a sign of a slower recovery, which is bearish for oil.

However, PMI reports from U.S. looked more optimistic. U.S. Manufacturing PMI increased from 50.9 in July to 53.6 in August while Services PMI rallied from 50 to 54.8.

In my opinion, oil needs more positive catalysts to continue its upside move, and a fragmentary increase of economic activity will not do the job.

The current consensus is that travel (especially air travel) will remain under pressure until an effective vaccine is introduced so the additional demand growth must come from the universal increase of economic activity.

In this light, oil traders will likely remain very sensitive to any news pointing to an economic slowdown, in Europe or elsewhere.

Russia Is Optimistic About The Current State Of The Oil Market

Following the OPEC+ meeting, Russian Minister of Energy Alexander Novak stated that OPEC+ members have almost reached the results they were targeting.

According to Novak, demand has rebounded to about 90% of pre-pandemic demand levels while supply was lower than demand by 1 million barrels per day (bpd) in July.

In addition, he stated that OPEC+ had all the resources to quickly increase production in case the market got overheated.

At this point, I see no signs that the oil market is anywhere close to the overheated state. While the market has started to work through excessive inventory levels, there is still plenty of work to be done.

WTI oil has started the month of July near the $40 level and currently trades near the $42 level. The pricing progress for Brent oil was similar.

For now, oil traders are not ready to aggressively bet on the additional recovery of the oil market, and it looks like significant decrease in inventory levels is required to push WTI oil beyond the $45 level.

For a look at all of today’s economic events, check out our economic calendar.