Forex Analysis & Reviews: 26.01.2021 - Falling into the abyss: oil...

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26.01.2021 11:31 AM

Falling into the abyss: oil has big problems ahead

Crude oil prices resumed negative dynamics on Tuesday morning amid a strained situation with the level of demand for black gold, which is limited against the background of the ongoing coronavirus pandemic and the rapid growth of infection. The problems associated with the long-awaited mass vaccination, namely the fact that it is going too slowly, only exacerbates the whole picture.

A new wave of coronavirus infection in China is adding fuel to the fire, which is now becoming almost obvious and inevitable, although the authorities are making every effort to rectify the situation. All this is already exerting serious negative pressure on the crude oil market, where demand is declining. Recall that China is one of the largest importers of oil in the world, and the level of consumption of raw materials during the celebration of the Lunar New Year traditionally grows. However, this year, the Chinese government seems to have no choice but to introduce the most stringent restrictive measures on the movement of citizens of the country so as not to repeat the scale of infection that was recorded last winter and spring. The national government is already actively encouraging people to stay at home and postpone their traditional travel to visit relatives. On the one hand, this can have a positive effect in the future, as severe consequences of infection can be avoided, and, consequently, the demand for raw materials will recover faster. On the other hand, the situation on the global black gold market will worsen significantly.

The price of futures contracts for Brent crude oil for delivery in March on the trading floor in London sank 0.68% or $0.38, to $55.5 per barrel. Monday's trading session ended with an increase of 0.9% or $0.47, which sent the final price at $55.88 per barrel. However, as a new day dawned, the problems returned.

The price of futures contracts for WTI crude oil for delivery in March on the electronic trading floor in New York fell 0.63% or $0.33, to $52.44 per barrel. Monday's session ended in the green zone with an increase of 1% or $0.5, sending the final price at $52.77 per barrel.

Seasonal tourist trips in China on the occasion of the celebration of the Lunar New Year should start very soon – on January 28. However, this year looks like it will be special. According to preliminary estimates of analysts, the total number of trips may decrease by at least 40% compared to the same indicator in 2019 and reach only 1.7 billion. This figure is 15% less than the one recorded last year.

The main problem for market participants now is connected with the fact that all the consequences of the travel restrictions imposed in China on the overall level of consumption of crude oil are still unclear. Nevertheless, there are already clearly visible signals indicating that the relationship between supply and demand for black gold is clearly not on the side of the latter. However, some attempts to support the oil supply market also exist, which is good news.

In particular, the Russian oil company, Urals, has already announced that it is going to cut its supplies in February by 2.2 million tons, which is 29% less than the level that was in the first month of 2021. Also, Iraq expressed its desire to reduce its production in the first months of 2021 to compensate for the shortage that was accumulated under the agreement with OPEC signed last year.

One way or another, all these measures may not be enough for the oil market to avoid serious problems soon. In this regard, no expert can yet judge the medium and long-term prospects of its development.

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