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Oil Remains Under Pressure As Virus-Related Restrictions Pose Risk For Oil Demand

Vladimir Zernov
·3-min read

Oil Video 31.07.20.

New Coronavirus-Related Restrictions Put Quick Oil Demand Recovery Under Question

Yesterday, WTI oil tried to settle below the $40 level as traders turned their attention to the worsening situation on the coronavirus front.

However, weaker U.S. dollar provided material support for oil which managed to return back above $40.

Today, oil is once again under pressure as market participants evaluate multiple headlines which are telling the world that a new round of coronavirus restrictions is just behind the corner.

UK Prime Minister Boris Johnson had to postpone the next stage of reopening as the number of new coronavirus cases increased.

Australia’s Victoria state, which suffers from the second wave of the virus, has signaled that it was ready to introduce new restrictive measures as the number of new infections remained high.

Poland also thinks about new restrictions for those regions of the country that have problems with containing the disease.

Germany introduced a qurantine for people returning from Spain’s Catalonia – an additional blow to Spain’s tourism sector.

As various countries are thinking about reimposing some of virus containment measures, the speed of oil demand recovery is under question.

Obviously, no country in the world will be able to absorb an economic hit from a second full lockdown so such scenario is impossible.

However, postponement of reopenings or introduction of additional restrictive measures is a serious obstacle on oil’s way to higher levels.

In addition, current problems with negotiations regarding the new U.S. coronavirus aid package add to traders’ worries.

Spread Between Front-Month Contract And Longer-Dated Contracts Starts To Increase

In a sign of potential glut, the spread between the front-month September 2020 contract and longer-dated contracts has started to increase for both WTI and Brent.

It looks like traders are worried that OPEC+ decision to increase production by 2 million barrels per day (bpd) comes at an unfortunate time as demand remains rather weak due to continued spread of coronavirus.

For example, the spread between the WTI September 2020 contract and the March 2021 contract is almost $2. The same difference is seen between Brent September 2020 and March 2021 contracts.

At this point, WTI oil is at important crossroads since it can stay near the $40 level or dive below the recent trading range, starting a new near-term downside trend under the weight of surging coronavirus cases.

In this situation, the upcoming trading sessions may set the tone for the whole month of August.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire