Oil drops on demand concerns, US-China trade tension

London (Debriefer)
2020-05-04 | Since 20 Hour

Oil prices drop

Reuters news agency reported that oil prices fell on Monday, paring last week’s gains, on worries a global oil glut may persist amid slumping demand and US-China trade tensions that could restrict an economic recovery even as coronavirus pandemic lockdowns start to ease.

US West Texas Intermediate (WTI) crude CLc1 futures fell as low as $18.10 a barrel earlier in the session and were down $1.01, or 5.1%, at $18.77 at 0658 GMT. The benchmark contract rose 17% last week.

Brent crude LCOc1 futures were down 10 cents, or 0.4%, at $26.34, after touching a low of $25.50. Brent rose about 23% last week following three consecutive weeks of losses.

“As optimism fades around global growth prospects, oil is giving up (last week’s) gains, aided by a strengthening US dollar,” said Michael McCarthy, chief market strategist at CMC Markets.

The US dollar .DXY firmed on Monday against a basket of currencies. Oil prices are usually priced in dollars so a stronger greenback makes crude more expensive for buyers with other currencies.

“Brent traders have concerns about manufacturing data due tonight from Germany, France and Italy, with its potential to shift the demand destruction argument to the Brent contract,” added McCarthy.

The market found support last week on signs of reduced infection rates and as major oil producers led by Saudi Arabia and Russia were set to begin cutting production on May 1. The top two US producers, Exxon Mobil Corp and Chevron Corp, each said they would cut output by 400,000 barrels per day this quarter.

The output cuts combined with the loosening of business restrictions in some US states and cities around the world were expected to ease the global fuel glut and pressure on storage tanks, helping to drive prices up last week.

Signs that the cuts may help reduce the reduce the supply overhang have emerged with the narrowing of Brent’s contango - the market structure in which later-dated prices are higher than prompt supplies.

The six-month spread of Brent futures LCOc1-LCOc7 hit its narrowest in almost a month at a discount of around $6.50, up from a record wide discount of almost $14 in late-March, reflecting decreasing oversupply expectations and making storage for later sale less profitable.

However, a threat by US President Donald Trump late last week to consider raising tariffs on China to retaliate for the spread of the coronavirus renewed fears that trade tensions could crimp an economic recovery, putting a lid on oil price gains.

“The resumption of the trade war will be detrimental to oil prices over the long term,” said Stephen Innes, chief global market strategist at financial services firm AxiCorp.

US drillers cut 53 oil rigs in the week to May 1, bringing the total count down to 325, the lowest since June 2016, energy services firm Baker Hughes said on Friday.

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