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Oil falls as concerns mount over rising coronavirus cases in China

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(S&P Global Platts) Crude oil futures tumbled during the mid-morning trade in Asia January 18, as rising coronavirus cases in China raised fresh demand-side concerns, while the spread of mutated strains of the virus also weighed down sentiment in the market.

At 11:10 am Singapore time (0310 GMT), the ICE Brent March contract was down 45 cents/b (0.82%) from the Jan. 15 settle to $54.65/b, while the February NYMEX light sweet crude contract was down 38 cents/b (0.73%) to $51.98/b. The Brent marker had fallen 1.59% in the week ended Jan. 15 to $55.10/b, whereas the NYMEX light sweet crude marker had ticked up 0.23% to $52.36/b.

The fall in oil futures comes as a jump in coronavirus cases in China threatened to derail crude’s demand recovery.

Towards the end of the week to Jan. 16, several Chinese cities were placed under lockdown to curb the spread of the virus. Even though the lockdown is due to be lifted by Jan. 19, fears of further restrictions remain heightened after the country reported over a hundred COVID-19 infections during each day of the weekend, according to media reports.

“We are seeing a continuation of the downward momentum from last week. Oil’s rally stalled in second half of last week after the market started to emerge from under the spell of the surprise Saudi production cut and started paying attention to the worsening pandemic situation in the western hemisphere and the worrying outbreaks in China,” Vandana Hari, CEO of Vanda Insights, told S&P Global Platts on Jan. 18.

Hari further added that, against the backdrop of the fresh outbreaks, the market took little solace from the reasonably strong Chinese economic growth data, which may have instead drawn more attention to China’s current struggle with the pandemic.

“It is not just the outbreaks in China that have rattled the markets, it is also the spread of three different and more contagious coronavirus strains reported in the UK, South Africa and Brazil,” Hari said.

Despite the escalation of the pandemic, analysts retained a largely bullish outlook in the medium-term, noting that oil remains supported by the 1 million b/d cuts from Saudi Arabia, the vaccine rollouts and hopes of further stimulus in the US.

“Despite the pullback in prices last week, the market remains supported by Saudi Arabia’s output cut. Assuming demand growth remains stable, this should see the drawdown on global inventories rise to 1.1mb/d in Q1,” said ANZ analysts in a Jan. 18 note.

Hari agreed, saying: “Majority of the premium from the Saudi cuts remains intact as 1 million b/d over two months is a substantial reduction in supply. However, with the resurgent pandemic, it remains a two step forward, one step back situation for now.”

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