Oil prices retreat over Covid concerns
Risk assets are moving in different directions on the first trading day of August. While Asian stocks and US futures advanced in early trading hours, oil prices declined following four straight months of gains.
Investors are becoming more concerned over the resurgent spread of Covid-19 and reports indicating slowing growth in China.
China’s Caixin manufacturing PMI fell to a 15-month low in July of 50.3, down from 51.3 in June as Covid-19 outbreaks, regional flooding, and high raw material prices led to a significant slowdown in manufacturing activity. While the underlying recovery in China’s economy still seems to be stable, those factors will continue to play as headwinds. However, it is still unknown which factors will remain and to what extent it will impact growth in the foreseeable future.
Thailand announced yesterday a plan to extend pandemic control measures in its capital Bangkok and other regions possibly till the end of this month to contain the worst-ever wave as cases continued to rise. In China, the outbreak has reached twenty cities and authorities are imposing fresh travel restrictions to contain the country’s most widespread wave in months. Australia deployed soldiers in some streets of Sydney to enforce stay-at-home rules as the city continues to struggle with new Delta outbreaks.
Oil traders will need to keep a close eye on Covid-related measures across the globe, particularly in Asia. Any additional strict measures in countries seeing new outbreaks could lead to slower demand. Risk-taking in equities and other asset classes could no longer mean higher oil prices as market dynamics change. However, expect the downside to be limited given the continued decline in US inventories.
Another thing for traders to monitor is the shape of the oil futures curve. So far, we remain in backwardation, which is a healthy sign, but the gap between September and October contracts for WTI futures had declined from 80 cents a month ago to 73 cents now. Further declines would indicate weaker demand and hence put some additional short-term pressure on prices.