Oil Prices May Be Range Bound

Oil prices are hovering around the US$ 38-42 levels with an obvious downward bias, at present. This downward bias is the result of the rising COVID-19 infections throughout the US and the major countries of Europe. Except for China, the prospects of any rise in oil demand is more or less ruled out due to the prevailing sluggishness in demand which started with the spread of the pandemic. China is the largest importer of crude oil in the world. But in China too, from an all-time high of 13 million barrels per day, the demand is currently at 11 million barrels per day. They have stocked high inventories to take care of any exigency including any spike in prices. The rise of the second and probable third wave of the pandemic, if that happens, is going to be the real challenge for the oil prices to remain where they are. In other words, there are enough reasons to believe that unless demand picks up prices may
not be able to sustain at higher levels unless there are output cuts. Any improvements in the global economy and aggressive production restrictions would be the twin factors which are relevant at this juncture.

There is an attempt to correlate the US presidency and oil prices in the wake of the US elections and the related reports about the differing approaches to exploration and fracking. But the ground level evidence on oil price movements prove beyond doubt that in the long run there is absolutely no relationship whatsoever between the US presidency and oil prices. Prices have moved up and down under presidents belonging to both the main political parties. This is borne out by the price movements in the last five decades. But it will be interesting to see how the bankruptcies in the oil exploration sector is going to be addressed in the coming days. The health of the sector and the outlook for the sector are important from the employment perspective.

The supply of oil from Libya has come back into the markets. This brings in a sentiment that favours more smooth markets. Apart from this, OPEC + is inclined to continue with the current cuts and also carry out further cuts in case the market conditions warrant that. A deeper cut in production and supply is favoured by many including Saudi Arabia. But much would depend on how the pandemic is contained and normal activity is restored in major parts of the world.


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