West Texas Intermediate sank to $63 per barrel after news reports suggested the Federal Reserve is about to start winding down its bond-buying program that kept the economy going through the worst of the pandemic crisis.
CNBC reported on Wednesday that more and more Fed officials are backing the end of stimulus, and tapering could begin as soon as next month. The report noted that uncertainty still remained elevated because of the resurgence of the coronavirus, and yet oil prices reacted immediately.
The central bank has been buying corporate bonds to the tune of $120 billion monthly to prop up commodity and stock markets. The tactic worked, as it tends to do, and as the economy returned to growth—and strong growth, at that—the big question was now when to start winding down these bond purchases. According to the minutes of the latest Fed meeting last month, the time seems ripe now.
Yet without the $120-billion monthly cushion, commodities would be left to market forces, which explains the drop in WTI, at least in part. However, the benchmark and its international cousin Brent crude also suffered the effects of continued and apparently deepening concern about the course of the latest wave of Covid-19 infections. Even a crude oil inventory draw of 3.2 million barrels couldn’t move prices higher for more than a few hours.
The situation with the coronavirus is especially worrying in Asia, where it is disrupting supply chains that span the globe. According to a Bloomberg report from earlier this week, these disruptions would inevitably affect oil prices and are already affecting them.
Earlier this month, China partially closed one of its biggest ports and major oil hub, signaling that weaker oil imports are on the cards. Some analysts warned more port closures could be on the way, too. Even if there are none, the disruption to manufacturing activity in the world’s main exporter region is enough of a cause for concern when it comes to oil prices. The concern can only grow in light of case counts in the United States, which are once again strongly on the rise.
By Irina Slav for Oilprice.com
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