Oil prices show caution in the face of growing Indian, Japanese infection rates

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Cautious production increases by OPEC+ and a strong business cycle upturn have encouraged bullish sentiment about downward pressure on oil inventories and upward pressure on the oil price in the second half of the year, Reuters columnist John Kemp reports in a recent post.

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Oil prices ease as infections rise in major importers Japan, India

oil price chart

Sodel Vladyslav/Adobe Stock

But prices have eased off last week and into this one. Initially, this came as caution rose over the prospect of output increases from shale producers. More recently, however, resurgent coronavirus infections in India and Japan, both major oil importers, have weighed on prices.

Despite growing optimism in the US and, to a lesser extent, in Europe, India’s oil demand remains in doubt.

India has posted several days of record-setting COVID-19 cases, with expectations they are going to get even worse. Bloomberg reports that demand for fuels could plunge by 20% in April.

It seems likely that new lockdowns could be in place for several weeks or even months. In turn, that would seriously impact Indian demand.

Likewise, Japan, the world’s fourth-largest importer, is seeing rising infection levels. There is now a third state of emergency in Tokyo, Osaka and two other prefectures began this past weekend, Reuters reports.

Lowered expectations of a return to pre-COVID levels of aviation are also depressing sentiment. As such, prices are being restricted to a $60-70 band — at least for the time being.

Long-term oil price look

Market sentiment remains supportive, albeit cautious, for longer-term prices.

Reuters reports the combined positions placed by hedge funds and portfolio managers across all six key petroleum futures and options contracts rose to a three-week high of 832 million barrels last week, according to records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission.

However, the current caution around the demand picture in Q2 will likely cap any further relaxation by OPEC+ on production limits. In short, producers fear doing so could remove support from current prices.

For producers as much as consumers, it is a case of watch and see. Consumers needing to fix prices would probably do well to buy on dips. In the longer term, the oil price remains more at risk to the upside than the down.

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