Oil Starts The Week On A Weak Note

Oil Video 07.12.20.

Coronavirus And U.S. – China Tensions Put Pressure On Oil

Oil fell below the $46 level as traders focused on the recent developments on the coronavirus front and the latest increase in U.S. – China tensions.

Most of California was put under a strict new lockdown as the number of new coronavirus cases continued to surge. The new stay-at-home order will be in place for at least three weeks and will certainly reduce demand for oil in the most populous state of the U.S.

In Germany, the region of Bavaria announced stickter lockdown measures until January 5. Bavaria is expected to relax some measures for Christmas but keep them in place for New Year celebrations.

The second wave of the virus continues to put serious pressure on the oil market, but OPEC+ will still increase oil production by 500,000 barrels in January 2021 as the group’s members want to boost their revenues.

At this point, the market believes that OPEC+ maintained its ability to reach compromise during challenging times. Most likely, oil will remain very sensitive to any indications of increased tensions between OPEC+ measures.

While OPEC+ managed to calm these tensions during recent negotiations, the continued increase of Libya’s oil production and a potential increase of Iran’s exports in case of softer U.S. policy on the country under Biden may present a very serious challenge for the group.

The Number Of U.S. Oil Rigs Continues To Increase

The recent Baker Hughes Rig Count report indicated that the number of U.S. rigs drilling for oil increased by 5 to 246. The number of working oil rigs is moving higher which is not surprising given the latest developments in the oil market.

Higher prices push producers to drill more in order to boost their revenues. Before the recent upside move in the oil market, EIA expected that U.S. domestic oil production will not be able to get far away from the 11 million barrels per day (bpd) mark.

However, the recent increase in the price of oil puts such forecasts under a big question. A combination of higher production levels and soft demand may boost inventories and put some pressure on prices. However, it should be noted that vaccine optimism remains strong so oil maintains decent chances to get to the $50 level even if the near-term fundamental situation remains challenging.

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