Coronavirus News Asia

Covid second wave casts a cloud over oil rally

Oil markets are responding positively to Thursday’s OPEC+ technical meeting, even though the group of oil exporters failed to agree to a sustained reduction of production to curb a persistent oversupply of the fuel.

Though the club did not decide, at least not yet, to continue its 9.7 million barrel per day (bpd) oil production cut into August, it did indicate that there is a strong 87% compliance rate with the current deal reached in April. But more work still needs to be done to get all members to adhere to the agreement’s production-cutting terms.

The bad boys of the club, including Iraq and Kazakhstan, were called on the carpet for their lack of compliance to the set quotas, but both pledged to more closely adhere to output cuts going forward.

The original OPEC+ deal, reached amid the worst oil demand destruction in history due to the Covid-19 pandemic, called for cuts of 9.7 million bpd for both May and June, then dropping to 8 million bpd for the rest of the year. Last month, the group extended the 9.7 million bpd production cut into July.

Yet, just a glimpse in the rearview mirror back to earlier this year, when oil production heavyweights Russia and Saudi Arabia engaged in an ill-timed and market-damaging price war, shows just how fragile OPEC+ consensus can be.

For now, a resumption of price war and the dynamics that created it does not appear to be on the cards. Global oil benchmark Brent crude was up 1.3% in afternoon trading in Asia on Friday, hitting the US$42.06 per barrel price point, while US oil benchmark West Texas Intermediate (WTI) crude was up 1.42%, at $39.39 per barrel.

Oil prices have recovered after collapsing due to the double whammy of the Covid-19 pandemic and a massive supply overhang. Photo: Facebook

Yet, storm clouds are still gathering over oil markets. A second wave of the Covid-19 pandemic could send the carefully orchestrated oil micro-management cards crumpling again as it did in April, when around one-third of global demand was removed from the market as economies worldwide shut down and oil prices hit record lows.

Fresh outbreaks this week in China, notably in the capital of Beijing, is a particular cause for concern. China, the world’s largest crude oil user, has seen its oil demand remain one of the few bright spots for markets over the last few months amid otherwise anemic oil demand.

In May, China’s oil imports jumped to a record high of 11.34 million bpd, up an impressive 19% year on year, General Administration of Customs data shows. Fresh Covid-19 outbreaks in Beijing and elsewhere in the Middle Kingdom, however, could zap demand again and put extra downward pressure on prices, just as they are struggling to find a floor.

Record high Covid-19 outbreaks in the US, the world’s largest oil producer and second-largest crude oil consumer, are also being reported in six key states. Arizona, Florida, Texas, Oregon and Oklahoma all reported their most ever new daily cases on Tuesday after all-time highs last week and as they continued to reopen their economies after lockdowns.

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