Oil selloff intensifies on Covid fears and risk of US-China intervention

US crude fell to a new seven-week low on Friday, settling at $ 76.10 a barrel. The drop is good news for American drivers hit by the seven-year high in gas prices, a crisis that has soured consumer sentiment on the American economy.

“We will definitely see some relief in gas prices at the pump,” Tom Kloza, president of the Oil Price Information Service, told CNN on Friday, adding that the relief will be “like a feather instead of sinks.” .

After a relentless rise, the national average price of gasoline finally stabilized at $ 3.41 a gallon, according to AAA. That’s pretty much flat for a week.

“It appears for now that the 2021 peaks have been set,” Kloza said.

Blocking nervousness

Unfortunately, one of the catalysts for Friday’s market crash is another sinister development on the Covid front: Austria on Friday announced plans to impose a national lockdown, the first in Europe this fall, in an attempt to reverse a spike in sales. Covid-19 cases. .

The blockade is generating fears in the oil market of new and harsh sanitary restrictions elsewhere that will slow down economic recovery and affect energy demand.

“Demand signals today are overwhelmingly bearish,” Louise Dickson, a senior oil markets analyst at Rystad Energy, wrote in a note on Friday. “The risk is real in Europe, especially if Austria’s move towards lockdown has a ripple effect across the continent. If Germany follows suit, price levels below $ 80 may be here to stay.”

Will China and the United States unite?

Beyond lockdown fears, oil markets remain nervous about the specter of the United States and China teaming up to intervene in previously hot energy markets.
Since crashing to $ 40 a barrel in April 2020, US crude has risen to $ 125 a barrel because supply simply hasn’t kept up with demand. OPEC and its allies, known as OPEC +, have only gradually increased production. American oil companies have also been in no rush to increase supply.

A coordinated release of two of the world’s largest energy consumers would have a greater impact than if the Biden administration acted alone to take advantage of the Strategic Petroleum Reserve.

Officials in China issued a statement on Friday suggesting that a barrel release from the country’s emergency reserve is on the table.

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“The bureau is moving forward with work related to the release of crude oil at this time,” authorities overseeing China’s strategic oil reserves said in a statement to CNN.

According to a reading released by the White House, US President Joe Biden and Chinese President Xi Jinping discussed during their virtual summit this week the “importance of taking action to address global energy supplies.”

A coordinated statement from the United States and China could also be used as a negotiating tool for OPEC + to turn on the taps, after months of refusing to do so.

“There is firepower with a concerted effort,” said Robert Yawger, director of energy futures at Mizuho Securities.

‘Short-term solution’

Still, this is not a long-term solution, as releasing barrels of emergency reserves does not resolve the underlying mismatch between supply and demand. And these emergency reserves contain a finite amount of oil, crude that is normally reserved for supply shocks, not for increased demand in the midst of an economic recovery.

The release of barrels today leaves reserves with less buffer for the next crisis, be it a hurricane, a conflict in the Middle East or another supply shock.

Goldman Sachs reiterated in a new report to clients Thursday that a coordinated release “would only provide a short-term solution to a structural deficit.”

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The Wall Street bank argued that this coordinated release is now “full priced,” meaning that the shock to the markets has already occurred.

“In fact, if such a release is confirmed and manages to keep oil prices low amid low trading activity through the end of the year, it would create clear upside risks to our 2022 price forecast,” the Goldman Sachs strategists wrote.

In other words, at least some on Wall Street are already looking beyond this emergency intervention, even before it happens, and predicting higher prices in the future.

Reference-www.cnn.com

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