Oil dives 3% as investors fear a second wave of coronavirus and the US reports surging crude inventories

ReutersThe sun is seen behind a crude oil pump jack in the Permian Basin in Loving County
  • Oil prices fell on Thursday due to a spike in coronavirus cases in the US and in India, as US oil inventories also rose.
  • Last week, US crude oil inventories rose by 5.7 million barrels, defeating expectations of a 1.45 million barrel decrease in stocks.
  • Analysts said rising cases this week in India and US increase the threat of a second wave of coronavirus, meaning lockdowns could go on for longer and weigh on the oil price.
  • One analyst said the shape of COVID-19 cases will dictate “whether this downward correction is simply a bull market correction, or the start of something more structural.”
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Oil prices dropped on Thursday as fears resurfaced that a second wave of coronavirus could hit the US and stunt economic activity, while data showing that US oil inventories surged last week also subdued prices.

On Wednesday, the US commercial crude oil inventories rose by 5.7 million barrels compared to the previous week. This defied expectations of 1.45 million barrel increase and stoked fears that demand is yet to recover from its pandemic lows.

Both West Texas Intermediate, the US benchmark, and Brent, the international standard, were down 3% at $US38.38 and $US40.55 respectively as of just before 6 a.m. ET. WTI had traded as low as 4% lower earlier in the day.

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Naeem Aslam, chief market analyst at Avatrade said: “Oil is down because of two major reasons. First is a fear of a second wave of coronavirus which raises the odds of another lockdown and slower reopening of the economy.”

He said the fact that US crude oil inventories have risen brings into question how quickly demand for oil can recover, particularly if the US and other countries face the spectre of longer lockdowns.

Jeffrey Halley, senior market analyst, Asia-Pacific at OANDA said: “Cases in the United States and India have spiked overnight, with both countries in danger of reaping what they have sown, by reopening their economies before COVID-19 was under control. Recklessly, and with massive complacency, on the US’ part.”

20,800 new cases were reported in the US, 4.1% higher compared to last week, meanwhile India reported almost 10,000 new cases on Thursday, its highest intra-day rise.

“The fall in oil prices is just as much about timing as COVID-19 cases though, coming as both equities and oil were looking overbought on any measure of short-term indicator,” Halley said.

He added: “Some sort of correction had been overdue after the massive increase in speculative long positioning, and oil’s breath-taking rally over the past month,” he added.

US oil prices had briefly turned negative in April as with every major economy placed under lockdown, the pandemic torpedoed demand for the commodity. Storage space for oil was also extremely limited.

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But prices largely rallied in May on signs economies are inching closer to recovery and due to an extension of OPEC production cuts until July.

The threat of a resurgence in coronavirus cases could erode those gains.

Halley said: “The trajectory of COVID-19 cases in the developed world, will dictate whether this downward correction is simply a bull market correction, or the start of something more structural.”

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