Oil Down on Geopolitical Tension But Recovery From Virus Lockdowns Still Strong

Meanwhile, Morgan Stanley raises its Brent forecast: File Image/PixaBay

Geopolitical tension finally replaced coronavirus related matters as the element that caused traders on Wednesday to send oil prices downward.

Specifically, U.S. president Donald Trump stating he was working on a strong response to China's proposed security law in Hong Kong caused Brent to fall $1.65 to $34.52 per barrel, and West Texas Intermediate to decline by $1.54 to  $32.81.

Also, Washington certified that Hong Kong no longer warrants special treatment under U.S. law, a blow to its status as a major financial hub.

Traders were also divided about Russia's commitment to deep oil cuts at a time when demand is only beginning to recover in the wake of the government-imposed Covid-19 lockdowns.

Phil Flynn, senior market analyst at Price Futures Group Inc., said, “It sounds great on paper, but the market is holding back excitement until we get a few more details about whether there will be cuts, how many barrels will be cut, and the length of the cuts."

The trepidation was sparked by Russian president Vladimir Putin and Saudi Arabia crown prince Mohammed bin Salman agreeing during a telephone call on further “close coordination” on oil output restrictions, according to the Kremlin.

Of course, the worldwide economic wreckage caused by governments still weighed heavily on trading activity, as it was disclosed on Wednesday that the euro zone economy will probably shrink between 8 percent and 12 percent this year, according to the European Central Bank.

Meanwhile, the International Energy Agency said the the coronavirus pandemic has paved the way for the largest decline of global energy investment in history and could have “serious” implications for energy security and clean energy transitions.

Still, despite the prevalence of scare-mongering media headlines (the latest of which chronicled the U.S. Covid-19 death toll crossing 100,000  as of Wednesday - still much less than the death toll caused by other diseases), an LRWGGreenberg survey showed that 74 percent of small businesses in the U.S. expect to return to business as usual within six months of virus restrictions being lifted.

The survey also found small businesses that adapted to using digital technology have been able to survive in the face of the outbreak.

Given the growing back-to-work spirit evident across the globe despite warnings from health officials, Morgan Stanley raised its year-end Brent price forecast to $40 per barrel, citing a faster than expected balance in global oil demand.

It stated, “We expect demand to rebound to about 97 million barrels per day (bpd) by Q4 as economies come out of lockdown - a significant improvement although still down about 4 million bpd year-on-year."

Cause for optimism was also to be had on the medical front, with a study from China showing that the number of asymptomatic people with the coronavirus suggests "silent" Covid-19 is much more prevalent than once thought and that these individuals may not spread the virus for as long as symptomatic patients do.

This accompanies recent reports that a significant number of people who’ve never been infected with the novel coronavirus already possess some immunity to it, and that virus patients cease to be infectious two weeks after developing symptoms (research also shows that the coronavirus’s mutations themselves don’t appear to have made it more infectious).