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Oil (WTI-Sep) made a high of 38.24 in the early U.S. session Tuesday, surged almost +1.92%, surged almost +2.63% on concern over supply disruption as another Hurricane Sally approaches in the US Gulf of Mexico region. The tropical Storm Sally remains a hurricane and forced oil drillers to evacuate rigs and halt production. As per U.S. government data, as of Monday afternoon, around 22%; i.e. 147 offshore production platforms were evacuated. Oil was also helped by upbeat economic data from China, indicating faster economic recovery from corona stress.
On Tuesday, oil was also supported by renewed hopes of corona stimulus 4.0 as the U.S. House Speaker Pelosi announced that the House will remain in session until the parties have an agreement on another round of emergency coronavirus relief. In a conference call with the House Democratic Caucus — the first since the chamber returned from a long summer recess — Pelosi indicated she isn't willing to accept a ‘skinny’ legislative package and told her troops the chamber's calendar will be extended until an agreement is sealed. As per the report, there are efforts to keep the latest stimulus bill around $2.5T, the middle path between Trump and Pelosi’s relief plan.
But oil was also undercut as the IEA trimmed its 2020 outlook for global oil demand growth by -8.4 mbpd to 91.7 mbpd. On Monday, the OPEC also downgraded its forecast in its latest monthly report, by -9.46 mbpd in 2020, more than the previous month’s estimate of a -9.06 mbpd drop.
In its latest Oil Market Report, the IEA struck a bearish tone, saying its outlook is more fragile than last month. The IEA noted that the pandemic is showing no signs of abating, falling in some places but rising in others. And demand in India fell month-on-month. The IEA cut its demand forecast by -0.3 mbpd for this year and by -0.6 mbpd for 2021. The IEA sees inventories drawing at a rate of 3.4 mbpd for the second half of 2020, a substantial draw but 1 mbpd lower than previously estimated.
The OPEC also downgraded the oil demand forecast on a weaker-than-expected recovery in India and other Asia countries. In its latest monthly report, OPEC cut its demand forecast for 2020 by around -0.4 mbpd and by -0.8 mbpd for 2021. The cartel also sees N-OPEC+ supply growing by more than previously expected.
The OPEC said: Further downside risk and higher uncertainty in the economic outlook exist for the near term, as India's economy may not be through the worst of the situation yet. With this in mind, it is likely that fiscal stimulus will require a large boost.
In India, the transportation fuel demand may be still below 75% of normal (pre-COVID) demand amid surging coronavirus infections and localized partial lockdowns in various parts of the country. Also, oil was dragged by the renewed concern of higher supplies after Libyan commander Haftar committed to ending a months-long blockade of oil facilities. Now the focus will be on catch up cut compliance in OPEC+ meeting later this week as there will be not any production cap or hike, at least till Dec’20.
Oil was also under stress on growing cold/digital war tensions between the U.S. and China and China had conducted large-scale military drills in an air defense zone controlled by Taiwan. Oil was also dragged by a renewed surge in COVID-19 infections on both sides of the Atlantic as-well-as Pacific (U.S.-Europe-Asia).
Oil was also under stress as the upcoming maintenance season in U.S. refineries may cut crude oil demand by around -1.5 mbpd. Also, on last Monday, Saudi Arabia (Aramco) cut October’s official price for Arab Light crude it sells to Asia by the most since May, indicating tepid demand from the region, especially China and India. Saudi Arabia also cut the U.S. selling price for the 1st time in six months.
China imported 11.18 mbpd of crude oil in August, almost -0.90 mbpd lower than 12.08 mbpd in July and well below April's record of 12.94 mbpd. Also, the demand for gasoline (oil) was affected as peak summer driving season in the U.S. is almost over. The EIA data also showed gasoline demand fell to 8.78 mbpd last Aug week from 9.16 mbpd a week earlier. There was also a report that the volume of crude arriving in China, the world's largest oil importer, is set to slow in September after rising for five straight months as its refiners gradually consume large inventories bought at relatively lower prices during peak COVID-19 disruptions and a friendly price war between Russia and Saudi Arabia (to force Trump & Co to cut production in line with OPEC+).
In Sep 1st week, oil was also under pressure on stronger USD and mixed U.S. economic data despite both the EIA and API reported bigger-than-expected draws in U.S. crude oil stockpiles.
The short term rally in oil may be over amid slower demand, especially subdued transportation sector and potential higher supplies from U.S., Mexico, Iran, Iraq, and Libya.
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