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Oil Buoyed By Equity Gains and Technical Support


By Ann Koh and Alex Longley

(Bloomberg) Oil in London moved back above $40 a barrel, as markets broadly rebounded from Tuesday’s sharp selloff.Futures rose 1.1% after a precipitous slump a day earlier that saw prices settle below $40 for the first time since June 15. While crude rallied along with other risky assets, it also found technical support on Wednesday. Brent dropped a few cents below its 100-day moving average, before turning sharply higher.

Brent moves away from its 100-day moving average Wednesday

Despite the rebound, prices remain below Tuesday’s open. Doubts linger over the strength of Asia’s demand recovery, U.S. consumption is set to ease with the end of the driving season and the easing of OPEC+ curbs on output are weighing on prices. The coronavirus pandemic is still raging and Bank of America Merrill Lynch said it will take three years for oil demand to fully recover from the outbreak even if there’s a vaccine.

“Brent has managed to find support below $40 for a second day with the 100-day moving average attracting some interest,” said Ole Hansen, head of commodities strategy at Saxo Bank. “Overall, however, it is probably the improved risk appetite from rising stocks that has helped an overall challenged short-term fundamental outlook.”

Prices
  • Brent for November settlement rose 1.1% to $40.21 a barrel as of 10:10 a.m. in London
  • West Texas Intermediate for October delivery added 1.7% to $37.37

In the near-term the market look soft, with the demand recovery fragile and inventories high, Morgan Stanley analysts Martijn Rats and Amy Sergeant wrote in a note and left its fourth quarter Brent forecast at $40 a barrel. However, the bank raised its estimate for the second half of next year by $5 to $50, on expectations of rising inflation and a weakening dollar.

See also: Oil Glut Trade on the Brink of Making Comeback in Blow for OPEC+

Combined with falling tanker rates, a weaker market structure is starting to make storing crude at sea an attractive proposition. Traders have also begun seeking out U.S. onshore storage, according to The Tank Tiger, an independent brokerage and consulting clearinghouse. The return of trading strategies that only work when the market is glutted is bad news for producers withholding supply to prop up prices.

Other oil-market news
  • Saudi Aramco, the world’s biggest oil company, is getting squeezed by its main shareholder, the Saudi Arabian government.
  • A key oil product used to make motor fuel and the building blocks for plastics such as water bottles is facing a growing glut in Asia, with the slump in airline travel exacerbating the surplus.


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