Covid, Inventory Numbers Spook Traders, Cause Crude To Drop Over 5 Percent

by Ship & Bunker News Team
Wednesday June 24, 2020

Relentless reports of rising Covid infections in several countries combined with U.S. crude stocks hitting a record high finally took its toll on trader optimism, resulting in an oil price tumble on Wednesday of over 5 percent.

Brent settled down $2.32, or 5.4 percent, at $40.31 per barrel, while West Texas Intermediate settled at $38.01 per barrel, losing $2.36, or 5.8 percent.

Although a stronger U.S. dollar weighed on prices, traders were mainly spooked by the Energy Information Administration disclosing that U.S. crude inventories swelled last week by 1.4 million barrels, compared to expectations of a 299,000 barrel rise.

More bad news on Wednesday came in the form of the International Monetary Fund, which further slashed its 2020 global output forecasts due to the government-mandated shutdown of the economy to slow the spread of the coronavirus causing deeper economic damage than originally thought.

Gene McGillian, vice president of market research at Tradition Energy, said of Wednesday's crude trading, "The market is signalling that if it doesn't get constant reassurance that we are emerging from the breakdown in demand that happened because of the pandemic, then higher oil prices really don't make sense."

Still, analysts taking a global view of the energy industry remained cautiously optimistic: John Kemp, commodities analyst for Reuters, noted that Brent futures prices have risen by more than 80 percent over the last two months, the fastest increase at any point for more than 25 years, and that "The global market has likely moved from a large production surplus in late April into a small production deficit by late June, which will draw down excess inventories and push spot prices to a premium."

Meanwhile, energy trader Mercuria expected oil stock draws would be around 2 million barrels per day (bpd) from July as the global economy restarts, and it also predicted a price floor for oil at around $40 per barrel in 2021.

As for longer-term recovery for the once-mighty U.S. shale industry, 80 percent of executives surveyed by the Dallas Federal Reserve expect it will take at least a year if not more for drilling and fracking to return to pre-Covid levels; Rystad doesn't see the U.S. returning to its February peak before 2023.

But if the fear of traders regarding rising Covid rates is a return to the lockdowns that devastated the economy, multiple signals suggest governments are now more inclined to take a different tack, case in point: instead of restricting activity, three U.S. states with the highest new infection rates have made mask wearing mandatory.

Also, in Ontario, Canada, some people who have tested positive for the virus but do not have symptoms will be allowed to return to work immediately, albeit with precautions; that province's chief medical officer of health stated that "As we learn more, we change things, we adapt."

Finally, Wednesday's gloomy economic prognostications pushed aside continued promising news on the vaccine development front, with noted American family and emergency medicine doctor Janette Nesheiwat stating that the University of Oxford's vaccine front runner candidate has produced "a strong robust immunity" on test subjects after two doses plus seems to prevent pneumonia.

There are 16 candidate vaccines in clinical evaluation and a further 125 in preclinical evaluation according to the World Health Organization.