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Crude gains still questionable as spreading virus, lockdowns weigh on demand

Crude oil upside looks limited and correction looks possible as sentiments have gone farfetched without any fundamental support.

December 29, 2020 / 12:50 PM IST

Oil prices settled up as the sentiment in the crude market has switched from a sell all strength to buy the dip after a bunch of positive triggers starting from the Brexit deal, vaccine optimism and positive US crude inventories data. The odds that Brexit deal may be done as well as the possibility that the COVID relief bill may get more cash into the hands of consumers is giving prices a lift. However, uncertainty remains over strain of the virus in the UK is threatening additional lockdown measures across Europe and reducing global travel routes.

Investors took some solace in signs of loosening restrictions against travel originating from the UK, where reports of the COVID mutation have been associated with a surge in infections. France reopened its border with the UK following a ban aimed at preventing the new strain from entering Europe. Drivers will now be allowed to enter France by tunnel or ferry on the condition that they provide a negative test for the virus. The resumption of both transport and people between the two countries is a positive development, but the requirement for a COVID test will impede movement nonetheless.

Prices got supported by a drawdown of US stockpiles of crude and gasoline raised hopes for some return in fuel demand. US crude inventories fell by 5,62,000 barrels to 499.5 million barrels (MB). This compares with analysts' expectations for a 3.2 million barrels drop. U.S. gasoline stocks fell by 1.1 MB, compared with expectations for a 1.2 MB increase.

This helped lift investors' hopes of increasing fuel demand, however the drawdown was likely resultant of reduced refinery runs as the end of year approaches, with gasoline supplied by refineries remaining nearly 14 percent lower in the last four weeks compared to a year ago. Fuel demand has been soft all year due to the pandemic and remains down some 13 percent in 2020.

In a sign of improving demand in Asia's second largest oil importer, the Indian crude oil imports for November rose to 18.28 million MT, 20 percent higher month-on-month. This was also the lowest YoY fall for any month since lockdowns were imposed in the country. This has also coincided with rising refining throughputs which went up 16 percent MoM.

Close

However, US energy firms this week added oil and natural gas rigs for a fifth week in a row as higher energy prices prompt producers to keep returning to the well pad in recent months. US energy firms this week added oil and natural gas rigs for a fifth week in a row as higher energy prices prompt producers to keep returning to the wellpad in recent months.

Natural Gas

Natural gas prices gapped lower on the opening at the start of week, driving the market to a multi-month low amid forecast of a major shift toward warmer temperatures. EIA reported a steep withdrawal of 152 Bcf natural gas storage for the week-ended December 18. The latest pull was shy of estimates around 159-160 Bcf. However, it was also more than the 146 Bcf pull recorded a year earlier and greater than the five-year average 127 Bcf withdrawal. Weather is expected to remain in the driver's seat when it comes to price action over the coming weeks. Markets are discounting the fact that due to warmer weather forecast, it could be a sign that even a major draw in this week's government storage report for the week-ending December 25 won't be enough to trigger a meaningful rally.

Outlook

Crude gains still look questionable as spreading virus and lockdowns are weighing on demand, but the hit is much smaller than earlier in the year and is likely only a speed bump to rebalancing the market. This will leave the oil market rangebound and choppy in coming weeks as vaccine enthusiasm is followed by headlines on tighten pandemic restrictions. This week is going to be a bit irrelevant, and due to a major lack of liquidity Christmas is at the end of the week. Although optimism is certainly justified as the vaccine has removed uncertainty for the market in the mid-term, the short-term crude demand remains lower with winter fast-approaching and government warn of a third wave of cases in the northern hemisphere, while we are still handling the consequences of the second-wave. The upside looks limited and correction looks possible as sentiments have gone farfetched without any fundamental support.

(Navneet Damani is the VP - Commodities Research at Motilal Oswal Financial Services Ltd.)

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.
Navneet Damani is the VP-Commodity Research at Motilal Oswal Commodity Pvt Ltd.
first published: Dec 29, 2020 12:50 pm

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