After penetrating above $42/bbl on Tuesday, oil has slipped below the $40 mark and is currently trading at around $38/bbl after swelling U.S. crude stockpiles and a surge in coronavirus cases across the nation raised concerns about demand in the world’s largest economy.
US Crude oil futures slipped 0.6% to below $38 a barrel, after the biggest fall in almost two weeks on Wednesday. New infections reached daily record in Florida, California and Texas, where the governor said a ‘massive outbreak’ is sweeping the state. U.S. gasoline tumbled the most in two months amid fears that lockdowns may need to be re-imposed.
Brent’s prompt time spread has dropped back into contango, a structure that suggests oversupply. The global economy is struggling to shake off the coronavirus, with the International Monetary Fund on Wednesday predicting a significantly deeper recession than it anticipated two months ago. American crude inventories have also risen for three straight weeks. These are making the job much tougher for OPEC and its partners as they push ahead with their record production cuts in an attempt to repair the market.
Key Covid-19 stats:
The US experienced its largest single day increase in new Covid-19 cases of more than 36,000 versus a previous high of 34,203 new cases (from April 25th)
The University of Washington IHME forecasts US coronavirus cases to pick up in August and September with the death toll to reach 180k by October.
New York, New Jersey and Connecticut are ordering visitors from coronavirus hotspot states to quarantine, this covers Alabama, Arkansas, Arizona, Florida, North Carolina, South Carolina, Washington, Texas and Utah. Additionally, New York Governor Cuomo said the federal government has been incompetent in handling the pandemic.
Texas Governor Abbott states that a massive virus outbreak is sweeping the state, while Houston, Texas, is reportedly on pace to exceed intensive care capacity by today.
Where does Oil head next?
This is largely dependent on how bad the current Covid-19 situation becomes, a worsening scenario is most definitely likely to dent any real upside in oil prices, even if OPEC tries to cut more oil output. Although an improvement in Covid cases could see prices rally back to $42. At the time of publication, the downside risks are far greater than the upside.
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