Oil Down as Stimulus Doubts Mount and US China Tensions Escalate
Oil fell in tandem with equities as concerns over renewed tensions between the US and China and a murky outlook for further relief from Washington cast an economic pall.
Futures dropped 1.7% in New York on the 7th August, the biggest decline in a week.
President Trump’s latest attack on Chinese tech companies and new sanctions on Chinese officials further stoked tensions between the countries. Meanwhile, another round of negotiations with Democrats on a virus relief plan ended without any agreement, indicating a long road ahead for a demand recovery.
Weaker equities and conflict between the US and China, “would at least for now hinder any kind of bullish tilt,” said Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors LLC. “You’ve got a little bit of a bid in the dollar,” putting further pressure on futures as well.
The Bloomberg Dollar Spot Index rose as much as 0.8% on the 7th August, reducing the appeal for commodities priced in the greenback.
Crude is testing the upper bound of its recent trading range after hitting a five-month high this week amid declines in US stockpiles. But the spotty recovery in oil consumption is restraining a potential breakthrough, with crude imports into China shrinking in July.
Drillers cut exploration in US oil fields to a 15-year low as billions of barrels from old discoveries became worthless and explorers abandoned growth plans.
“Traders are taking a wait-and-see approach,” said Andrew Lebow, senior partner at Commodity Research Group. “There are a lot of fairly large countervailing forces on the market.”
The 3-2-1 refining margin for combined gasoline and diesel against US WTI — a rough profit gauge for processing a barrel of crude — slumped more than 5% to below US$10 a barrel as the pandemic keeps Americans at home during what’s typically the summer driving season.
In physical markets, Poseidon crude, a heavy sour oil, rose 5 cents to 45 cents above Nymex oil futures on the 7th August, the largest premium in over two months.
Earlier last week, the discount on Bakken crude for delivery at Clearbrook, Minnesota, narrowed to five cents below Nymex WTI futures, its smallest discount since May.
A fresh round of stimulus in the US could boost sentiment over the demand outlook, but lawmakers have yet to reach an agreement. No progress was made at the end of the week and it’s not clear whether there will be additional discussions.
Treasury Secretary Steven Mnuchin said he’ll recommend Mr Trump move ahead with executive actions to halt evictions and possibly restore some unemployment aid.
Meanwhile, OPEC+ is returning supply to the market this month as it tapers its record output curbs, but habitual quota cheat Iraq has promised to make deeper cuts following a call with Saudi Arabia on the 6th August.
Oil Minister Ihsan Abdul Jabbar pledged that Iraq will cut output by an extra 400,000 barrels a day in August and September, on top of a previous commitment to slash 850,000 barrels a day in each month.
“The market is likely to remain in a sideways, choppy condition until we see what OPEC+ is really up to on their export programme for August,” said Tom Finlon of GF International.
Source: Rigzone