Oil slips as rising global virus toll causes uncertainty over demand

Crude futures have remained steady following the Opec+ announcement last week that supply is set to increase gradually

An aerial view of a crude oil storage facility at WTI's physical delivery point in Cushing, Oklahoma. Limited capacity at Cushing was one of the reasons behind the benchmark's plunge into negative territory in April. AFPShow less

Oil prices slipped at the start of trading on Monday as questions over demand recovery resurfaced due to the rising global toll of Covid-19 cases.

Brent, the benchmark under which two-thirds of the world’s crude is traded, was down 0.7 per cent at $42.84 per barrel at 5.42pm UAE time. West Texas Intermediate, which tracks US crude, was down 0.67 per cent at $40.32 per barrel.

The benchmarks opened lower despite a reassuring front shown by the core Opec+ countries last week, which plan to ease restrictions on crude output following signs of a pick-up in demand.

The Opec+ group of producers will hold back output by 7.7 million barrels per day from August, alongside compensatory cuts by countries that exceeded their quotas between May and June this year.

The group has been cutting back an historic 9.7m bpd since April after WTI prices fell below zero over fears of US storage capacity limits being reached as May contracts expired.

"Crude futures were little changed both day-on-day and week-on-week. In fact, crude prices were amazingly serene considering that Opec+ confirmed their plan to hike crude output by some 2m bpd from the start of August, while oil demand uncertainty still prevails across the short, medium and long term, courtesy of the coronavirus pandemic,” JBC Energy said in a note on Monday.

The fall in crude prices, which are currently close to four month highs, also comes amid slowing consumer sentiment in the US, which has been hardest hit by the coronavirus pandemic. Several US states have reimposed lockdowns as infections in the world’s largest economy rose past 3.7 million, as of Monday, according to Johns Hopkins University, which is tracking the outbreak. Globally, more than 14.5 million cases of the pandemic have been recorded, with more than 606,000 deaths.

“The US is now responsible for almost 30 per cent of global new infections over July to date, while India is contributing a further 13 per cent. The key question now is how much longer governments will wait before implementing new lockdown measures, and just how strict these will be,” JBC said in its report.

Both countries are key consumers of crude and a demand recovery requires a restoration of mobility and factory activity in both countries.

Prices also remained weak due to slowing demand from China, the world’s top importer of crude. Beijing, which filled its storage with oil purchases when prices were at historic lows, is now poised to resell some stocks in market following their recovery.

US crude is also poised to make a cautious comeback if prices remain stable, as the current range is more supportive of the shale industry than the steep declines experienced in April.

“Whilst the current level oil prices seem to be encouraging shut-in oil wells to be brought back on-line, higher prices will be needed for drilling of new oil wells,” Riyadh-based Jadwa Investment said in a report.

"As such, current forecasts from the US’s Energy Information Administration (EIA) point to oil output declining on both a quarter-on-quarter and year-on-year basis until end of next year.”

The bank raised its forecast for Brent by $4 and expects the benchmark to average $43 per barrel this year.