Oil prices extends losses, dipping below US$48 despite US stimulus

The passage of a US stimulus bill into law kept oil prices’ losses in check on Monday, despite pessimism from a new Covid-19 strain.

  • Oil staged a short-lived price recovery after Trump finally inked an aid package
  • But it went back on a downtrend as virus pessimism persisted
  • OPEC+ supply is also set to increase in the new year
  • Want to take a position on oil? Open an IG account today

What are the latest oil prices?

Oil prices steadied on Monday (28 December 2020) after US President Donald Trump signed into law a long-awaited US$2.3 trillion pandemic relief and government funding package.

Trump had previously refused to sign the bill, without which, millions of Americans would face a loss in benefits.

The latest news gave a temporary boost to sentiment, helping energy markets quickly recoup most of their losses from a sluggish start in Asian trading.

But shortly after, both Brent and West Texas Intermediate (WTI) crude resumed their slide.

At around 01:23 EST, Brent crude (December 2020 contract) was 0.66% lower at US$50.95 a barrel, while WTI (December 2020 contract) was down 0.56% at US$47.96 per barrel.

Why did oil head south at the open?

US crude futures had already tumbled below US$48 a barrel early Monday morning, after losing 1.8% in the previous week.

Bloomberg reported that tighter restrictions in the UK and China in response to a new, more transmissible Covid-19 strain kept investors pessimistic. Moreover, the US is bracing for a surge in coronavirus cases after the holidays.

Fears that Trump would not sign the stimulus bill had also pressured oil prices lower in early trade.

DailyFX analyst Daniel Dubrovsky wrote on Christmas Eve that any further information about the new Covid-19 strain could risk market volatility.

Elsewhere, FX Empire’s James Hyerczyk on Monday observed that traders are ‘showing little reaction’ to Trump’s signing of the bill, which may suggest that the focus in the coming week will instead be on future oil demand and the OPEC+ decision to increase supply.

Expected hike in oil output

The Organization of the Petroleum Exporting Countries and its partners, collectively known as OPEC+, will return 500,000 barrels per day (bpd) of output to the market starting in January 2021.

This effectively eases production cuts at the start of next year to 7.2 million bpd, and defied market expectations that the oil-producing cartel would extend existing production cuts of 7.7 million bpd for at least three months.

Rystad Energy’s Paola Rodriguez Masiu noted that the increase in production of 500,000 bpd as of January was not ‘the nightmare scenario the market feared’, and that markets are now reacting positively with prices edging up.

Furthermore, Russia plans to support another increase in OPEC+ production at the group’s next meeting scheduled for 4 January 2021, which will determine how much supply should be added to the market in February.

‘To restore our output, that we’ve reduced a lot, the price range of US$45 to US$55 a barrel is the most optimal,’ said Russia’s deputy prime minister Alexander Novak.

He added that Russia will support a further hike of 500,000 bpd in February if the situation is ‘stable’. That would mean OPEC+ will still be withholding 6.7 million bpd from the market by then.

How to trade oil with IG?

Are you feeling bullish or bearish on oil contracts?

Either way you can buy (long) or sell (short) the asset using derivatives like CFDs offered on IG's industry-leading trading platform in a few easy steps:

  1. Create a live or demo IG Trading Account, or log in to your existing account
  2. Enter <US Crude> or <Brent Crude> in the search bar and select the instrument
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

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