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Crude shows signs of exhaustion as US-China tensions intensify

May 27
09:04 2020

Ravindra Rao

Crude oil witnessed sharp gains in last few days on expectations of tighter markets with producers cutting output aggressively and demand improving with easing of virus-related restrictions.

The rally, however, seems to be losing steam as global economies remain under pressure while increased US-China tensions have put up a new challenge.

WTI crude has witnessed a massive recovery from a low of $ (-) 40.32 per barrel on April 20 to a high of $ 34.66/bbl on May 21. After the first ever sub-zero trade during expiration of May contract, NYMEX WTI June contract expired last week without any drama easing market nerves to some extent. Brent crude hit a low of $ 15.98/bbl on April 22 to hit a high of $ 36.98/bbl on May 21, a rally of over 130 percent in just over a month.

The biggest factor which has helped crude price recover is aggressive production cuts by US along with OPEC and allies. US weekly crude production has declined for seven consecutive week and slumped to the lowest level since July 2019. Drilling rigs targeting crude oil in the US fell to 237 rigs last week, that’s the 10th consecutive weekly drop and a 65 percent decline since March 13. US producers may continue with production cuts however stability in prices could slow down the pace.

OPEC and allies are adhering strictly with the 9.7 million barrels per day production cut deal as is evident from comments from key producers like Saudi and Russia. OPEC and allies will now meet on June 10 to reassess their production cut deal. While they continue to support production cuts, the success of current production cuts in stabilizing prices may give OPEC some room to consider further aggressive cuts.

On demand front, crude has benefitted from countries easing virus related restrictions. Amid the latest, Japan has ended restrictions nationwide paving way for businesses to reopen while India has started domestic flights. The severe economic pressure on major economies has forced them to ease virus related restrictions. However, continuing surge in cases worldwide may force countries to take a cautious approach. This is evident from US decision to restrict travel from Brazil to the US. Brazil now has the second largest virus cases after US.

US-China tensions have intensified with US blaming China for its handling of the virus outbreak. Adding to it is Chinese national security law for Hong Kong which has been criticized by US. US-China tensions have fueled concerns about the phase 1 trade deal which was signed in January earlier this year. China has committed to higher purchases of US energy and agri goods as part of the deal and any fallout of the deal may not be good for crude oil and commodities at large.

The author is VP – Head Commodity Research at Kotak Securities.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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