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The recent appreciation of oil prices has lost traction this week. According to Ryan Fitzmaurice, Commodity Strategist at Rabobank, the deteriorated sentiment on the back of growing coronavirus cases and the build-up on inventories have increased downside risks to prices.

Key quotes

“Covid-19 cases have been spiking across key regions around the globe as lockdown conditions have begun easing. This put the oil market on its back foot as investor sentiment shifted from a “risk-on” to a “risk-off” attitude given the threat of further restrictions or even a second wave of outbreaks.”

“This deteriorating oil market sentiment was only exacerbated by rapidly swelling inventories in the US and abroad. Further to that end, the US Department of Energy reported another crude build in the US of +1.44mb which took total commercial stocks there to a new all-time high of 541mb (excluding the SPR).”

“On top of the fundamental pressures, retail investors have been pulling significant capital from oil exchange-traded products in a sharp reversal from a few months ago when money was pouring in.”

“Looking forward, we see downside risks forming to both flat price and calendar spreads as a result of record-high petroleum inventories, passive fund restructuring, and the looming index roll pressure.”