On June 22, the oil prices dropped significantly as worries grew that a record surge in global COVID-19 infections may plague the recovery in fuel demand. That factor was seen to outweigh the tighter supplies from major oil producers.
Brent crude LCOc1 lost 24 cents, or 0.6%, to settle at $41.95 a barrel by 1141 GMT. Furthermore, the West Texas Intermediate (WTI) crude contract for August CLc2 became the day’s most active contract. It lost 25 cents, or 0.6%, to settle at $39.58.
On Monday, South Korea confirmed for the first time that it was in the midst of a second wave of the pandemic. The World Health Organization (WHO) also reported a record explosion in global cases on June 21. The biggest increase in the positive cases came from North and South America.
Rystad Energy’s head of oil markets Bjornar Tonhaugen commented:
“Infections are rising in key markets around the world and there are valid concerns that the world is in for a prolonged period of dealing with its consequences.”
After several weeks of rising, the prices of physical oil have started to ease as the recent rally imploded. The rally succumbed due to the reality of poor refinery margins together with brimming inventories according to the experienced traders and analysts.
In the past week, both Brent and US contracts gained around 9%. The surge was supported by a recovery in fuel demand as countries resume economic activity after easing most of the lockdowns.
Strategies For The Future Of Oil Price
Interestingly, Bank of America (BofA) Global Research has now lifted its oil price forecast for 2020. It also lifted its forecast for 2021 as demand gradually recovers while the OPEC+ output cut deals limit supply while producers reduce capital expenditure.
BofA now sees Brent averaging $43.70 a barrel this year, up from a previous estimate of $37. The bank also predicts average oil prices of $50 and $55 per barrel for 2021 and 2022 respectively. The bank stated:
“As we head into next year, we believe transportation demand could recover at a faster rate than we initially anticipated.”
Brent has now moved into backwardation indicating that there might be a recovery in global markets and tighter supplies. In the case of backwardation, the oil for immediate delivery costs more than supply later. LCOc1-LCOc2.
The Organization of the Petroleum Exporting Countries together with allies like Russia (OPEC+) is yet to decide whether to extend a record supply cut of 9.7 million barrels per day (bpd) into the fourth month. If it does that, the supply cuts will run until the end of August 2020. Russia stated that $40 to $50 per barrel is a fair price.