Oil Down On Demand Fears, But State Of Demand Is Debatable

Many analysts see demand growth starting this spring: File Image/Pixabay

While the persistent fear of government mandated Covid restrictions impacting demand recovery has been challenged by data, it was sufficient enough on Wednesday to cause oil prices to pull back on recent gains - although the losses were minimized by a drop in crude inventories.

After it was reported that U.S. stockpiles dropping by 3.2 million barrels last week (for a fifth straight week of declines), Brent settled at $56.06 per barrel, down 52 cents; West Texas Intermediate settled at $52.91 per barrel, falling 30 cents.

Demand fears were triggered by China recording the biggest daily jump in coronavirus cases in more than five months, despite lockdowns, increased testing and other measures, and by governments across Europe announcing tighter and longer coronavirus lockdowns on Wednesday.

Still, the true state of demand remains debatable, and Phil Flynn, senior market analyst at Price Futures Group Inc., said of the U.S. inventory draw, “The refiners are starting to see a better demand picture and that’s being reflected not just what we’re seeing in the United States but also overseas."

Giovanni Staunovo, oil analyst at UBS, was of mixed sentiment: “While I see crude prices trading higher over the coming months, investors need to be mindful that the road to higher oil demand and prices will remain bumpy."

For his part, Russel Hardy, CEO at Vitol, said demand may begin rising in April and will recover by 6 to 6.5 million barrels per day (bpd) in 2021.

Meanwhile, Mohammad Barkindo, secretary general of the Organization of the Petroleum Exporting Countries (OPEC) told an industry event on Wednesday that  Saudi Arabia's recent vow to enact a further 1 million bpd in output cuts will help the oil market navigate through seasonally low oil demand during the first quarter.

As for the 30,000 foot view of the energy market, Mark Tepper, president and CEO of Strategic Wealth Partners, pointed out that after declining by 37 percent in 2020, energy is now the top performing sector, up by nearly 15 percent since the first of this year.

He said, "Oil has found support; unfortunately, it’s because of a reduction in supply rather than an increase in demand, [and] oil’s down about 3 percent now year over year whereas energy stocks are down about 30 percent year over year - so, there’s definitely the possibility of a catch-up.”