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Oil Pulls Back as China Lockdowns Temper ‘Euphoria’

Oil futures traded sharply lower Friday, with U.S. prices set to erase their gain for the week, as investors weighed news of fresh COVID-19 outbreaks in China, which has been an engine of demand as other major economies were slowed by the coronavirus pandemic.

“Oil market euphoria is unequivocally strong, but market indicators from Asia are mixed,” said Michael Tran, analyst at RBC Capital Markets, in a note.

“China, the global engine of oil demand growth, is wrestling with fresh COVID outbreaks and lockdowns in various regions throughout the country have led to a tapering in discretionary driving patterns,” he said.

Barron’s reported that China saw 107 locally transmitted cases of coronavirus on Wednesday, according to its National Health Commission, the most since July. On Tuesday, it saw 85 cases. Although the numbers seem small compared with large daily tallies in the thousands in the U.S. and elsewhere, they come after China went for a long stretch with few outbreaks following a hard lockdown last year.

Ninety percent of the new cases are in Hebei province, which encircles Beijing, prompting a quick lockdown that has led to 28 million people under home or hotel quarantine, the commission said.

The global tally for confirmed cases of the coronavirus that causes COVID-19 climbed above 93 million on Friday, according to data aggregated by Johns Hopkins University, while the death toll rose above 1.99 million. The U.S. has the highest case tally in the world at 23.3 million and the highest death toll at 388,705, or more than a quarter of the global total. 

Against that backdrop, West Texas Intermediate crude for February delivery fell $1.49, or 2.8%, to $52.08 a barrel on the New York Mercantile Exchange. Prices based on the front-month contract settled Thursday at their highest since February of last year, but the U.S. benchmark is now on track to post a 0.3% weekly decline.

March Brent crude, the global benchmark, was down $1.58, or 2.8%, at $54.84 a barrel on ICE Futures Europe, headed for a 2.1% weekly fall.

”Crude has seen a resilient run in the first couple of weeks of 2021,” said James Hatzigiannis, chief market strategist at Ploutus Capital Advisors. “However, it is now approaching severely overbought levels.”

This week, “we saw reports of a reduction in the crude oil surplus, increase in refinery activity and demand of gasoline increase, all bullish developments for crude,” he told MarketWatch, but oil prices “have gone up too quickly, a correction is overdue. All bullish developments have been priced in.” 

Chinese demand may drop, Hatzigiannis said, because the country “strategically increased their reserves” in 2020 when oil prices were historically low.

Meanwhile, some forecasts indicate that U.S. travel “will not return till the third quarter of this year,” he said, adding that he expects to see a significant rise in oil demand sometime in the late spring when infections should start to significantly decline.

Demand should also see a “slight bump” from President-elect Joe Biden’s new $1.9 trillion stimulus package.

For WTI, “$50 is a big psychological price level” and it would take a “major bearish development for crude to drop below that level,” said Hatzigiannis.

Given the “combination of the Saudi’s commitment to manage supply and indications that we are starting to see light at the end of the tunnel when it comes to the infections, I think we will stay above $50 for the long term,” he said.    

Petroleum products traded on Nymex moved lower along with oil in Friday dealings. February gasoline lost 1.9% to $1.5246 a gallon, with prices trading around 1.1% lower on the week, while February heating oil dropped 2.3% to $1.5811 a gallon, poised for a weekly rise of around 0.1%.

February natural gas traded at $2.753 per million British thermal units, up 3.2% for the session and trading 1.9% higher for the week.

Source: Marketwatch

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