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Rising tension: oil markets are under pressure


The cost of crude oil dropped on the trading's bottom. The reasons for what happened should be considered the next round of aggravation of geopolitical tension, as well as a possible slowdown in demand growth.

It can be recalled that at the very beginning of the coronavirus pandemic, the cost of crude oil collapsed as a result of a sharp decline in demand. According to most experts, in order for the situation to return to its previous rhythm, it is necessary first of all to return the pre-coronavirus level of demand. However, this is still a long way off: the situation is complicated by the formed fears and consumer insecurity, which so far cannot be fought, since there are plenty of external pressure factors.

In this regard, even the positivity from the news of the slow but purposeful opening of the economies of the world does not give much adjustment for growth. This news is leveled by the growing conflict between the two largest economic powers - the United States and China.

As it became known, America is ready to ratify a new package of sanctions against China any time this week. It should be noted that the US government is extremely dissatisfied with the fact that Chinese colleagues want to introduce a bill on national security in Hong Kong. In response, US authorities may deprive the city of the status of a global financial center.

In addition, oil is winning back news about active negotiations between Russia and its OPEC partners. The latter put forward a proposal to extend quotas for reducing the production of black gold, which should come to an end by next month. OPEC believes that it is advisable to remove oil production for another two months. Negotiations on this issue have now entered an active phase. If we manage to come to an agreement and the decline continues, this could be a good incentive for oil growth in the market.

The price of futures for Brent crude oil for July delivery in London declined on the trading floor by 0.75%, or $ 0.27 in monetary terms yesterday morning, which sent it to the level of $ 35.90 per barrel. Yesterday's trading session ended for raw materials with an increase of 1.8% ($ 0.64).

The price of WTI crude oil futures for July delivery in electronic trading in New York also fell: a decline of 0.9%, or $ 0.31. The current level of light oil is $ 34.04 per barrel. Contracts, on the contrary, increased by 2.11%, or 0.71 dollars on Tuesday.

In general, the decline in the cost of crude oil cannot yet be called critical: it is a well-justified swing that investors should be prepared for, while there is no solid thing that would provide oil with quality support.

Analysts also argued that much will depend on the level of demand for gasoline. According to recent estimates, the demand for fuel has declined significantly: a drop is likely to occur around 30%. The main reason for this is still the COVID-19 pandemic, against which people stopped moving far from home, and gasoline consumption, of course, declined.

However, there are more positive views on the market. Some experts express confidence in the near restoration of the balance in the oil products market, which is waiting for us in the first summer month. Although this sounds extremely optimistic at first glance, there is some justice in this, since the process of returning to normal life and restoring economies has already been launched and will gain impulse in the near future.

Of course, concerns about new outbreaks of coronavirus infection persisted, but they no longer have such an effect.

Nevertheless, basic forecasts do not yet reflect a significant jump in prices on the black gold market. The cost of raw materials will continue to grow, which, by the way, will be extremely unstable. Given all the favorable factors, North Sea oil will be able to increase its average cost in the region of $ 30 per barrel only by the end of this year. And if the situation changes for the worse, then the average indicator of its price will not exceed $ 19 per barrel in annual terms.

The reduction in stocks will not play a big role either, since it will be possible to reach the pre-crisis level no earlier than in six months, and this is a rather long-term prospect. Although the price of oil will continue to move up, it will be limited by a narrow range. Experts expected that Brent crude oil will be at the level of no more than $ 45 per barrel by the end of this year.

At the same time, there is a very real danger of a fall in the cost of crude oil next summer. The excess of raw materials is still not liquidated, although there is a struggle with it, and support comes only occasionally against the background of news about the restoration of demand in the Asia-Pacific region and a possible restoration of demand in Europe. All this, however, has not yet been confirmed by real statistics and, in fact, may not even be justified.

At the moment, according to analysts, it is possible to imagine several factors that will significantly put pressure on oil. Firstly, COVID-19's second outbreak. Secondly, the agreement of all OPEC members to continue acting within the framework of the signed agreement on reducing oil production. Third, an increase in crude oil production on the territory of the United States of America if prices exceed the level of $ 30 per barrel. Fourth, the correction of consumer habits, which, first of all, will result in a reduction in the number of flights and trips by car, which will lead to a reduction in demand for gasoline and other fuels. So far, these are the main sore points for black gold, but we should also add the ongoing conflict between Washington and Beijing. It is also important that the recovering demand against the background of an excess of supply will create a struggle for sales markets, which, of course, will not add any positivity to the already shaky oil market.

The material has been provided by InstaForex Company -