Oil Rebounds After Yesterday’s Sell-Off

Oil Video 22.10.20.

Gasoline Demand Continues To Decline

Yesterday’s EIA Weekly Petroleum Status Report indicated that gasoline inventories increased by 1.9 million barrels.

According to EIA, demand for gasoline declined from 8.58 million barrels per day (bpd) in the previous week to 8.29 million bpd. Two weeks ago, demand for gasoline was 8.9 million bpd.

The trend is clear – demand for gasoline continues to decline which leads to the increase in gasoline inventories.

A year ago, gasoline demand was much stronger at 9.59 million bpd. The difference between current levels and demand in 2019 is 1.3 million bpd. Most likely, the key catalyst behind the recent drop of gasoline demand is the challenging situation with coronavirus in the U.S.

Yesterday, the U.S. reported more than 63,000 new cases of the disease, and the pandemic shows no signs of a slowdown. It is hard to expect that gasoline demand will soon get back to pre-pandemic levels if the number of new cases is rising.

While the EIA report showed that crude inventories decreased by 1 million barrels, it remains to be seen whether the downside trend in crude inventories would be sustained in the upcoming weeks.

Oil Stays Above $40 Despite Worries About Demand

Currently, several negative catalysts put pressure on oil. Europe is struggling to contain the second wave of the virus, and European countries are forced to introduce additional virus containment measures to improve the situation.

The U.S. is also suffering from the virus, and demand for gasoline is declining. Meanwhile, Libya’s production has increased to 500,000 bpd while the country’s government aims to increase production to 1 million bpd by the end of the year.

Despite these strong negative catalysts, oil continues to trade above the $40 level. Why? One could argue that oil traders hope that OPEC+ will extend current production cuts for the first months of 2021 instead of increasing production by 2 million barrels from January 1, 2021. This is a plausible scenario.

Another possible explanation is that oil is simply cheap at current levels. Despite short-term problems, oil demand is set to recover, and prices should ultimately recover as well.

At this point, the futures market is skeptical about a robust recovery since December 2021 futures trade below the $43 level, but the situation may change quickly once the second wave of the virus is contained.

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