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Yousef Alshammari

Yousef Alshammari

Dr. Yousef Alshammari is the CEO and Head of Oil Research at CMarkits, London, UK. He is a former Research Fellow at OPEC with a…

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Oil Prices In Limbo As Fears Of A Second COVID Wave Grow

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Oil markets sent some mixed signals last week as bullish and bearish data continued to influence prices. The COVID-19 situation in the United States raised some uncertainty over the prospects of demand recovery, while the announcement of a vaccine by the University of Oxford provided significant price support and optimism. 

A 2nd wave of COVID-19 may be on the horizon 

Markets were increasingly concerned about a 2nd wave of COVID-19 over the past week as data reflected a sharp rise in the number of cases. We have always been very cautious about raising our demand forecast during the 2nd half of 2020. Rystad Energy now forecasts demand in 2020 to stand at 89.7 million bbl/d while considering a 2nd wave as a base scenario, which is 0.65 million bbl/d below our forecast, and significantly less than the latest forecast of OPEC, IEA, and the EIA. Yet the impact of a 2nd wave on global demand is not expected to be as bad as the first demand shock last April as the world is far more prepared to handle lockdown measures in a more local manner. Yet, the impact may continue to weigh on crude markets in 2021 and beyond as fuel demand continues to suffer due to movement restrictions.

Deteriorating US-China relations continue to weigh on the markets 

The deteriorating relationship between the United States and China continues to weigh on the global markets. Last week, the US government ordered China to close its consulate in Houston, accusing it of spying activities under the guise of diplomatic work, while China retaliated by ordering the United States to shut down its consulate in Chengdu. Furthermore, the resurgence of COVID-19 cases in the United States and the introduction of lockdown measures in some states led to rising concerns about the speed of demand recovery in the world’s largest petroleum consuming economy. According to John Hopkins University, the number of COVID-19 cases in the United States exceeded 4 million, with 15.4 million cases confirmed globally. In addition, 1.42 million US citizens have filed for unemployment benefits over the past week. The US President issued a warning that the COVID-19 crisis is likely to worsen, harming the US economic recovery. It is expected that the US congress will agree on a new stimulus package as extended unemployment benefits will expire at the end of the month. Concerns over the US economy led to a weakening US dollar, reflected by the US dollar index which closed at 94.38, down by 1.57% w/w. However, a weaker US dollar has encouraged buying of dollar denominated commodities including oil and gold which have become more affordable to holders of other currencies. Gold rose to historical levels trading above $1900 last week, which was mainly driven by the ongoing US-China political tension, fears of a global recession and a weakening US dollar.  Related: Is The Bottom Finally In Sight For U.S. Drilling Rigs?

Price spike was not only due weakening US dollar, but also bullish demand sentiment 

In what can be seen as bullish news for oil markets, EU leaders have agreed to a 750 billion economic stimulus for the euro-zone. In addition to this, the University of Oxford has announced promising results from its vaccine clinical trials suggesting that the vaccine could be introduced by September. These bullish factors have contributed to a price spike in Brent and WTI which traded above $44 and $41, respectively, last week. If the vaccine proves to be successful, the potential impact on the global economy would be dramatic, as shown by the sharp rise in prices last week. 

Additional bearish data from the United States with rebounding drilling activities 

Bearish data last week came in the form of a slight rise in the U.S. oil rig count, which capped the rally last week. The U.S. oil rig count rose to 181 active oil rigs, up by 1 rig w/w. Drillers were incentivized the rise in WTI crude, which has been holding above $40 over the past couple of weeks. We expect a further increase in U.S. oil rigs over the next few weeks as prices continue to rise.

Furthermore, the EIA reported a rise of 4.9 million barrels w/w in the commercial crude inventories. Although this was less than what was reported by the API (7.9 million barrels), it raises serious concerns about the recovery in oil demand. Next to the rise in crude inventories, the EIA reported a decline in gasoline stocks by 1.8 million barrels w/w, and a rise in distillates stocks by 1.1 million barrels w/w. U.S. refinery runs declined to 14.206 million bbl/d, down by 103 thousand bbl/d w/w signalling a decline in fuel demand due to new lockdown measures in some states. Additionally, U.S. crude oil production rose to 11.1 million bbl/d, up by 0.1 million bbl/d w/w. Bearish inventory data led to Brent closing the day lower last Tuesday and Wednesday. In the light of a slow economic recovery, we currently expect prices to be limited not only by staggering demand in the United States, but also by a rise in U.S. drilling activity and a rebound of production rates. 


By Yousef Alshammari for Oilprice.com

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