13.11.202011:42 Forex Analysis & Reviews: Oil prices fall amid frightening demand prospects

Oil prices dropped more than 1.5% on Friday morning amid pessimism around the recovery in demand.

The cost of December futures for the North sea oil mix Brent fell by 1.52% to $42.87 per barrel, and December futures for WTI oil – by 1.85% and reached $40.36 per barrel. However, at the end of the week, both contracts may increase in price by about 10%.

Clearly, the uncontrolled increase in COVID-19 cases in the US and Europe is putting strong pressure on oil demand. This is mostly due to quarantine measures imposed by states to reduce the rate of spread of the virus. So, on Friday, in connection with the increasing number of cases of coronavirus infection, in Detroit, Chicago, and California, quarantine measures aimed at curbing the spread of infection have been resumed. In European countries, the need to extend restrictions is being discussed against the background of a complex epidemiological situation. In Japan, a record daily increase in coronavirus cases was recorded on November 12. It is obvious that restrictive measures, although so necessary to preserve the safety of the population, entail a large-scale drop in fuel consumption.

In addition, on Thursday, the US Department of Energy published data on the growth of oil reserves in the country, which over the previous week increased by 0.9% to 488.7 million barrels per day. At the same time, experts on average predicted a drop in reserves by 3 million barrels. Black gold reserves in Cushing, where oil traded on the New York Mercantile Exchange is stored, fell by 518 thousand barrels over the week. Gasoline reserves in the US also fell by 2.31 million barrels last week, and distillates by 5.35 million barrels. Analysts on average predicted a reduction of 600,000 barrels and 2 million barrels, respectively.

Despite promising news about successful trials of the coronavirus vaccine, which kept markets positive throughout the week, the timing of its mass use remains uncertain. At the same time, the euphoria in the background of the announcement of a life-saving drug continues to excite the markets. So, a few weeks ago, oil prices fell sharply, responding to new restrictive measures in connection with the uncontrolled spread of the second wave of coronavirus. And during this week, prices for Brent and WTI crude oil showed an increase of more than 10%.

However, at present, analysts consider this euphoria on the news of an effective vaccine too hasty and warn that the price of black gold is not justified given the market fundamentals. Experts also add that in the current situation, when the demand for oil is reduced in comparison with the supply, such price indicators are not reasoned in the short term.

The prospects for a recovery in oil demand to pre-pandemic levels remain even dimmer. On Thursday, the International Energy Agency (IEA) reduced the forecast for global oil demand in 2020 and slightly increased expectations for a recovery in demand in 2021 due to the worsening epidemiological situation in the United States, Europe, and Asia. Experts believe that world oil production may increase by more than 1 million b/d in November if Libya continues to post strong production growth as the US recovers from the hurricane season.

Experts note that more stringent and large-scale quarantine measures may cause OPEC+ members to abandon the planned easing of production restrictions. The next OPEC+ meeting is scheduled for next week. At the same time, on Thursday, November 12, the Crown Prince of the Kingdom of Saudi Arabia and one of the leaders of OPEC+, Mohammed bin Salman said that the country will not count more than 100 billion rials (over $27 billion) in the 2020 budget due to the collapse in oil prices this year.