U.S./China Tensions Cause Price Drops, But 2021 Demand Recovery Still Expected

Meanwhile, Saudis boost prices due to vaccine hopes: File Image/PixaBay

The lingering positive effects of the Organization of the Petroleum Exporting Countries' (OPEC) deal to continue the bulk of existing supply curbs weren't enough to detract from rising tensions between the U.S. and China on Monday, and as a result oil prices fell by about 1 percent.

News that Washington was preparing to impose sanctions on Chinese officials over their alleged role in Beijing's disqualification of elected opposition legislators in Hong Kong caused Brent to fall 46 cents, or 0.9 percent, to $48.79 per barrel; West Texas Intermediate fell 50 cents, or 1.1 percent, to settle at $45.76 per barrel.

Prices were also pressured by news that Iran's oil ministry will prepare installations for the production and sale of crude oil at full capacity within three months: Edward Moya, senior market analyst at OANDA, remarked that "Iran is optimistic the U.S. will ease restrictions if they return back to the 2015 nuclear deal."

Also weighing on crude was lockdowns to curb rising Covid rates in California, Germany, and South Korea; additionally, traders were concerned over U.S. gasoline consumption: it fell during the Thanksgiving holiday week to the lowest in more than 20 years, according to OPIS, as fewer Americans hit the road during the pandemic.

Still, the OPEC deal plus Covid vaccinations starting in the UK on Tuesday and in the U.S, within two weeks compelled Morgan Stanley to increase its long-term Brent forecast to $47.50 per barrel from $45 and revised up its long-term WTI forecast to $45 per barrel from $42.50.

John Kemp, commodities analyst at Reuters, said the vaccines were the reason for hedge fund managers being the substantial buyers of petroleum futures and options last week for the fourth week in a row, which he noted was "a sign of increasing confidence coronavirus vaccines will drive a recovery in oil consumption next year."

Funds purchased the equivalent of 44 million barrels in the six most important petroleum futures and options contracts in the week to December 1, taking total purchases over the four most recent weeks to 304 million barrels; long positions already outnumber shorts by 4:1, up from 2:1 four weeks ago.

One country that is already raising oil prices due to vaccine optimism is Saudi Arabia: the kingdom's Saudi Aramco raised pricing for Arab Light crude for Asia by 80 cents per barrel to 30 cents above the benchmark.

Edward Bell, senior director for market economics at Emirates NBD PJSC, said, "Aramco views the demand picture in Asia as recovering to pre-pandemic levels, led mainly by China."