Oil sell-off increases due to concerns about Covid and the risk of US-China intervention

US crude fell as much as 3.5% on Friday, hitting a six-week low of $76.17 a barrel. In just 9 days, the price of oil fell by 10%.

Tom Kloza, president of the Oil Price Information Service, told CNN on Friday: “We’re definitely going to see a drop in the price of gas at the pump station, adding that the price drop will.” as light as feathers, not reduced”.

After a relentless rise, the nationwide average gas price finally leveled off at $3.41 per gallon, AAA. That is almost unchanged from a week ago.

“It looks like now the 2021 peaks have been set,” Kloza said.

Lockdown jitters

Unfortunately, one of the catalysts for Friday’s drop in the market was another ominous development on the Covid front: Austria announced plans on Friday to impose a national shutdown, for the first time in Europe this fall, in an attempt to reverse the spike in Covid-19 cases.

The shutdowns are stoking fears in the oil market that tough new health restrictions elsewhere will slow the economic recovery and eat into energy demand.

Louise Dickson, senior oil market analyst at Rystad Energy, wrote in a Friday note: “Demand signals are bearish today. “The risks are real in Europe, especially if the Austrian shutdown has a continent-wide domino effect. If Germany follows suit, sub-$80 prices could be here.”

Will China and the US join forces?

Beyond shutdown concerns, oil markets remain unsettled over the specter of US and China working together intervened in hot energy markets in the past.
Since dropping to minus $40 per barrel in April 2020, US crude has rallied to $125 per barrel because supply simply hasn’t kept up with demand. OPEC and its allies, known as OPEC+, have only gradually increased production. American oil companies nor in a hurry to replenish the supply.

A coordinated release from two of the world’s biggest energy consumers would have a bigger impact than if the Biden administration acted alone to tap the Strategic Petroleum Reserve.

Officials in China issued a statement on Friday indicating that the release of the barrels from the country’s emergency stockpile was in place.

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“The agency is promoting the work related to the release of crude oil at the moment,” the authorities that monitor China’s strategic oil reserves said in a statement to CNN.

According to a news release released by the White House, US President Joe Biden and Chinese President Xi Jinping discussed during this week’s virtual summit “the importance of taking measures to address the global energy supply.”

A coordinated release by the US and China could also be used as a bargaining chip to get OPEC+ to open the faucets, after months of refusing to do so.

“There is power with a concerted effort,” said Robert Yawger, Head of Energy Futures at Mizuho Securities.

‘Short-term fix’

However, this is not a long-term solution, as the release of barrels from the emergency stockpile does not address the fundamental supply-demand mismatch. And these emergency stocks contain a finite amount of oil—crude oil is typically stockpiled for supply shocks, not demand surges amid an economic recovery.

Today’s release of barrels leaves reserves insufficient to cushion the next crisis, whether it’s a hurricane, a Middle East conflict or another supply shock.

Goldman Sachs reiterated in a new report to clients on Thursday that a coordinated release would “provide only a short-term fix for the structural deficit.”

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The Wall Street bank argues that the coordinated release is now “fully priced in,” meaning the impact on the market has already occurred.

“In fact, if such an issue is confirmed and keeps oil prices down amid low trading activity later in the year, it would create a clear upside risk,” wrote Goldman Sachs strategists. for our 2022 price forecast.”

In other words, at least some on Wall Street have been looking at this urgent intervention – before it happened – and anticipating higher prices ahead.


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