Crude Oil Drops Below $ 40, Amid Oversupply Fears – OPEC+ Increases Production! - Forex News by FX Leaders
Will the OPEC+ Agree to Oil Production Cuts?

Crude Oil Drops Below $ 40, Amid Oversupply Fears – OPEC+ Increases Production!

Posted Monday, August 3, 2020 by
Arslan Butt • 3 min read

During Monday’s Asian trading session, the WTI crude oil prices failed to gain any positive traction, declining to the $ 40.00 level, having hit a low of 39.88, while representing declines of 0.82% on the day, mainly due to the mixed trading sentiment, backed by the intensifying coronavirus woes, which fueled demand-growth concerns. On the other hand, the declines in the oil price could also be attributed to the reports that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) had taken steps to increase oil production.

Moreover, the mild bullish bias of the broad-based US dollar, triggered by high safe-haven demand, also exerted downside pressure on the oil prices. The geopolitical tensions among the world’s two biggest economies also weighed on the risk sentiment, contributing to the oil losses. At the moment, the WTI is trading at $ 40.09 and consolidating in the range between 39.88 and 40.42.

On the coronavirus front, the long-lasting pandemic continued to decrease the expectations of a recovery in the demand for fuel from the world’s biggest consumers. According to the latest reports, the number of cases globally has almost passed the 17 million mark, with 4.4 million confirmed cases and more than 150,000 deaths in the US alone. Elsewhere, the Australian state of Victoria recorded 429 new coronavirus cases on the day, with 13 deaths recorded so far. It is worth reporting that there are currently 6,489 active coronavirus cases in Victoria, with 416 hospitalizations. Considering the on-going rise of COVID-19 cases in Australia, Premier of Victoria, Daniel Andrews, said that he would announce further business restrictions, which would further fuel concerns over the recovery of the oil demand. Meanwhile, Tokyo also reported 292 new coronavirus infections on the day.

Apart from this, the reason behind the investors’ cautious sentiment could also be associated with the fact that the Organization of the Petroleum Exporting Countries and its allies (OPEC+) will start to increase oil production, with about 1.5 million barrels per day being added to the global supply this month.

Besides this, the WTI crude oil sellers drew additional strength from the rising tensions between the United States and China. US President Donald Trump recently warned China that they would ban the popular video app TikTok, which is managed by Chinese tech company ByteDance. At the weekend, Secretary of State Michael Pompeo also warned that the US would soon take action against Chinese software companies that provide data directly to the Chinese government, as this represents a risk to US national security. Moreover, the Dragon Nation seems to be in trouble in terms of meeting the US farm import target, which is causing further obstacles for the Sino-American trade deal. Meanwhile, the editor of the Global Times (GT), Hu Xijin, recently criticized the US coronavirus (COVID-19), citing the US government’s inability to get the coronavirus under control.

On the other hand, the lack of progress concerning the fiscal package also weighed on the risk-tone and contributed to the oil losses. Notably, the United States policymakers failed once again to reach an agreement regarding the much-awaited fiscal package, despite fruitless talks over the weekend, as the Democrats and Republicans failed to settle differences over the size of the package. The Democrats are willing to offer $ 3.5 trillion in aid, while the Republicans are not prepared to accept anything more than $ 1.0 trillion. The members of the US Senate also failed to give any details regarding the unemployment claims benefits, which expired on Friday.

On the positive side, the crude oil prices are set for a gradual recovery, as the gradual easing of coronavirus-led restrictions increases demand. At the same time, the second COVID-19 wave could slow the pace of recovery once again.

Due to the escalating tensions between the US and China, uncertainty concerning the fiscal package, and worries about the surge in the coronavirus (COVID-19) pandemic, the broad-based US dollar took some safe-haven bids on the day. However, the gains in the US dollar could be attributed to the losses in the US stock futures. The gains in the US dollar became the key factor that capped the upside in the oil prices, as the oil price is inversely related to the price of the US dollar. The US Dollar Index, which tracks the US dollar against a bucket of other currencies, increased by 0.11% to 93.535 by 9:47 AM ET (2:47 GMT).

Looking ahead, the market players will keep their eyes on early-month activity numbers from China and the US. The USD price moves and coronavirus headlines will also play a key role in determining the intraday momentum. Elsewhere, the updates concerning the US fiscal package discussions could also offer some support to the black gold. Good luck!

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About the author

Arslan Butt // Index & Commodity Analyst
Arslan Butt is our Lead Commodities and Indices Analyst. Arslan is a professional market analyst and day trader. He holds an MBA in Behavioral Finance and is working towards his Ph.D. Before joining FX Leaders Arslan served as a senior analyst in a major brokerage firm. Arslan is also an experienced instructor and public speaker.
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