Oil sale intensifies over fears of Covid and risk of US-Chinese intervention

US crude fell to a new seven-week low on Friday, settling at $ 76.10 a barrel. The slide is good news for American drivers affected by the seven-year peak in gasoline prices – a crisis that has soured consumer views on the US economy.

“We will certainly see some relief in gasoline prices at the pump,” Tom Kloza, chairman of the Oil Price Information Service, told CNN on Friday, adding that the relief would be “feather-shaped rather. that diving “.

After relentlessly rising, the national average gas price finally stabilized at $ 3.41 per gallon, according to AAA. It’s been pretty much flat for a week.

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

Locking nervousness

Sadly, one of the catalysts for Friday’s market crash is another worrying development on the Covid front: Austria on Friday announced plans to impose a nationwide lockdown, the first in Europe this fall, with the aim to reverse a peak in Covid-19 cases.

The lockdown raises fears in the oil market of further severe health restrictions elsewhere that will slow economic recovery and reduce demand for energy.

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

Will China and America team up?

Beyond foreclosure fears, oil markets remain nervous over the specter of the US and China teaming up to intervene in previously scorching energy markets.
Since falling below $ 40 a barrel in April 2020, U.S. crude has climbed to $ 125 a barrel because supply simply hasn’t kept up with demand. OPEC and its allies, known as OPEC +, have only gradually increased their production. US oil companies have also been in no rush to add supply.

A coordinated liberation of two of the world’s largest energy consumers would have a greater impact than if the Biden administration acted alone to exploit the strategic reserve of oil.

Chinese officials released a statement on Friday suggesting that a release of barrels from the country’s emergency reserve is on the table.

“The office is currently advancing work related to the release of crude oil,” authorities who oversee 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 at their virtual summit this week “the importance of taking action to deal with the world’s energy supply.”

A coordinated release by the United States and China could also be used as a negotiating tool to get OPEC + to turn on the taps, after months of refusal.

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

“Short-term correction”

Yet this is not a long-term solution, as releasing barrels from emergency reserves does not resolve the underlying mismatch of supply and demand. And these emergency reserves contain a finite amount of oil – crude that is usually reserved for supply shocks, not increased demand amid an economic recovery.

Releasing barrels today leaves reserves less room for the next crisis, be it a hurricane, a Middle East conflict, or some other supply shock.

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

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The Bank of Wall Street argued that this coordinated release is now “built into the price,” meaning the impact on the markets has already occurred.

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

In other words, at least some on Wall Street are already looking past this emergency response – before it even happens – and predicting higher prices to come.

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