Oil drops as rise in virus cases stokes demand fears

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TOKYO/SINGAPORE- Oil prices slid on Tuesday on lingering concerns over the threat to fuel demand from the resurgence of new coronavirus infections around the world, though hopes for further cuts in crude supplies stemmed losses.

Brent crude fell 20 cents, or 0.5 percent, at $39.52 a barrel having gained 2.6 percent on Monday. US oil dropped 21 cents, or nearly 0.6 percent, to $36.91 a barrel, after closing 2.4 percent higher in the previous session.

Coronavirus cases rose to more than 8 million worldwide by Monday, with infections surging in Latin America, while the United States and China are dealing with fresh outbreaks. But some observers said they didn’t expect to see any return to the stringent lockdowns seen at the start of the year.

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“While the run of COVID-19 headlines emphasize that a demand recovery is likely to be a slow process, it seems unlikely that we see a return to the lockdown measures of 1H,” said Stephen Innes, Chief Global Markets Strategist at AxiCorp, in a note.

Hopes of more cuts in oil supplies by major producers also helped prevent steeper price drops, analysts said.

Prices rose on Monday after the United Arab Emirates’ energy minister expressed confidence that OPEC+ producers – members of the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia – that have not been in full compliance with previously agreed cuts would up their game.

“Renewed optimism that OPEC+ production cuts could remain in place if we see second-wave (coronavirus) concerns intensify have oil prices refusing to enter freefall,” said Edward Moya, senior market analyst at OANDA.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, a grouping known as OPEC+, agreed this month to extend production cuts of 9.7 million barrels per day through July. They also called on members that have not been complying to make up their commitments with extra cuts later.

Elsewhere US shale producers are also cutting back on drilling amid the collapse in demand for oil.

Production from seven major US shale formations is likely to drop to close to a two-year low of 7.63 million barrels per day by July, the US Energy Information Administration said on Monday.

US drillers have slashed production and the number of oil rigs fell below 200 last week, the lowest since June 2009, according to energy services company Baker Hughes Co.

Meanwhile, oil demand is recovering from the greatest fall in its history in 2020, the International Energy Agency (IEA) said on Tuesday, but less flying due to coronavirus fears means the world will not return to pre-pandemic demand levels before 2022.

“Our first forecast for 2021 as a whole shows demand growing by 5.7 million barrels per day (bpd), which, at 97.4 million bpd, will be 2.4 million bpd below the 2019 level,” the IEA said in its monthly report.

“Reduced jet and kerosene deliveries will impact total oil demand until at least 2022 … the aviation industry is facing an existential crisis”, the Paris-based IEA said.

The IEA raised its forecast for 2020 oil demand by nearly 500,000 bpd due to stronger than expected imports in Asia.

“China’s strong exit from lockdown measures has seen demand in April almost back to year-ago levels. We have also seen a strong rebound in India in May, although demand is still well below year-ago levels.”

Citing a plunge in global oil supply by 11.8 million bpd in May, the IEA said the Organization of the Petroleum Exporting Countries and its allies including Russia – a grouping known as OPEC+ – had reduced their output by 9.4 million bpd.

“If recent trends in production are maintained and demand does recover, the market will be on a more stable footing by the end of the second half, the IEA said.

“However we should not underestimate the enormous uncertainties.”

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