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Oil prices drop as demand concerns offset U.S. stimulus hopes

July 28, 20207:20 AM Reuters0 Comments

oil pumpjack at sunsetOil prices edged lower on Tuesday, erasing gains earlier in the session, as rising coronavirus cases dampened the outlook for demand and countered optimism over more U.S. stimulus.

Efforts to stimulate the U.S. economy’s recovery from the coronavirus crisis had raised hopes for stronger oil demand.

U.S. West Texas Intermediate (WTI) crude futures fell 53 cents, or 1.22%, to $41.17 a barrel.

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Brent crude futures fell 16 cents, or 0.37%, to $43.28 a barrel.  Both benchmarks rose as much as 0.5% earlier in the session.

“A weaker U.S. dollar is supporting both base and precious metals, but oil traders appear focused on the economic signal that the lower dollar is flashing – i.e. demand destruction,” said Michael McCarthy, chief market strategist at CMC Markets.

A weakening of the dollar typically helps improve demand as that makes crude cheaper for global buyers.

Gold prices surged to record highs this week, powered by investors seeking cover from COVID-19’s global economic toll, as reflected in faltering stocks and U.S.-China trade tensions.

The U.S. dollar dropped to its lowest in nearly two years against a basket of six other major currencies on the back of a surge in U.S. coronavirus cases. Florida and California have now both overtaken the previous epicentre, New York.

But losses could be capped by fresh government aid packages that could help fuel demand.

“Oil prices will continue to draw support from the Fed’s dovish policy,” AxiCorp market strategist Stephen Innes said in a note.

U.S. Senate Republicans on Monday proposed a $1 trillion coronavirus aid package worked out with the White House to revitalise the economy with expanded unemployment benefits for millions due to expire this week, although Democrats urged more support.

Further aiding the stimulus, the U.S. Federal Reserve’s policy-setting panel meets on Tuesday and Wednesday, where it is expected to reiterate it will keep interest rates near zero for years to come.

“For oil prices to break out higher, there must be a significant flattening of the U.S. Sunbelt COVID-19 case count curve at a minimum,” Innes said.

Traders will be watching out for U.S. inventory data due from the American Petroleum Institute industry group later on Tuesday and the government on Wednesday. Refined products stockpiles are expected to have declined last week, while crude oil stockpiles are expected to have held steady, five analysts polled by Reuters estimated.

On the down side for fuel demand, Europe’s largest low-cost airline, Ryanair, on Monday cut its annual passenger target by a quarter after bookings were hit in recent days, and warned a second wave of COVID-19 infections could lower that further.

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