Crude oil prices are narrowly consolidating around an 11-month high. After bouncing about 20% from the March low, upward momentum appears to be weakening. Traders are increasingly worried about the outlook for demand, which could be hurt by a resurgence of coronavirus cases in China. Sentiment aside, the short-term supply & demand forecast suggests that the risk is biased towards the downside.
A resurgence of coronavirus cases in China in the weeks leading up to the Lunar New Year festival could weaken demand from the world’s second-largest oil consumer. The data suggests that travel to and from Chinese cities has become moderate since early December, about -6% below pre-pandemic levels.
The Chinese government reported 793 new cases last week, up from less than 300 two weeks ago. While Chinese data is always prone to problems with accuracy and transparency, this is the highest number in 10 months. Isolation measures escalated with 11 million people in Shijiazhuang, the provincial capital in northern Hebei.
Meanwhile, more than 5 million people are being detained in Suihua in northern Heilongjiang province. Stricter isolation measures could reduce traffic and economic activity, thereby weakening demand for crude oil and petroleum products.
Crude oil prices have softened as the dollar strengthened while the latest restrictive measures in China will wreak havoc on the Lunar New Year journey. Oil demand in China is at the core of the current recovery in prices, so any deeper restrictions should put some pressure on the sale of Brent and WTI crude.
OPEC Secretary-General Barkindo’s optimistic comments at the Iranian IPEC conference had little effect on oil prices. Barkindo reminded energy traders that the worst for the global oil market is over and that investment in oil has fallen 30% in 2020. The most impressive comment he made was that the rate of virus spread will continue to slow recovery. Barkindo stuck to the scenario and did not offer any new insights into the demand outlook.
A significant development in the energy sector was the decision by S&P Global Ratings to put under negative scrutiny the majority of major oil companies such as Exxon and Royal Dutch Shell. Rating agencies are always late and this warning seems long overdue.
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