Brent Slips to the Floor

Brent has come down below the US$ 70 mark after a long while. The main reason that has caused this fall is the emerging demand conditions which may not be favourable as China faces one of the worst outbreaks of the pandemic since the first wave in late 2019. Transport services and movement of people has been either suspended or restricted between many larger cities and towns in an attempt to contain the spread of the pandemic. This may depress the demand for oil in the immediate term as China along with India forms the largest chunk of demand for fuel. Any fall in demand from these territories directly affects the price and usually this has an impact that gets transmitted over a few months. Close to this is the surge in the number of infections in the US as well as several other Asian and European countries. So, much of this fall in prices is demand-led. There is another factor that may weigh on oil in the long run which is the latest UN report on climate change and the dangerous levels to which global warming has risen. This may lead to some deliberate reduction in the exploitation and use of fossil fuel in the coming
years. The move to replacing traditional transport vehicles with electric vehicles has gathered pace, and governments across the world are likely to offer several incentives for users of electric vehicles to ensure speedy replacement of the existing stock. Yet another factor which is important is the strength of the US Dollar in the recent weeks owing to the perception that the US inflation levels would compel the Fed to revise the policy rates earlier than previously expected. The strength in the US Dollar generally pulls down oil prices, as evidenced by past price action, including that of other commodities like gold. There has been slowdown in the economic activity in China in the recent months, and some amount of enhancement of supply after the OPEC+ agreement with UAE on unwinding of inventory build-up, also will support lower prices. But we cannot expect any drastic fall in prices at this juncture and the levels US$ 68 and US$ 63 would act as strong support levels.


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