Oil prices declined over 5% on Wednesday, as the bearish correction accelerated amid a combination of a widespread risk aversion and dismal industry data from the EIA. Brent crude dipped below the $40 psychological level and registered mid-June lows around $39.70 on Thursday. The futures managed to recoup intraday losses afterwards and has settled above $40 since then. As a result, Brent created a long lower wick on the daily timeframes, suggesting the downside potential could be limited in the short term.
In general, risk sentiment remains negative as investors continue to express concerns over the situation surrounding the coronavirus theme, with cases continuing to rise in many countries. Adding to the bearish market sentiment, the IMF downgraded its economic outlook for 2020 and 2021, citing a larger-than-expected economic fallout from measures introduced to contain the Covid-19 pandemic. The Fund now projects that global GDP will decline by 4.9% this year, down from a projected 3% decline in its April outlook. Furthermore, there are rising tensions on the geopolitical front, with Trump Administration threatening to impose additional tariffs on goods exported from several European countries which could be a sign of the impeding US-EU trade war.
As for the industry news, the Energy Information Administration reported a 1.4-million-barrel increase in crude oil inventories for the week to June 19 while crude oil production averaged 11.0 million barrels per day, up by 500,000 barrels per day from the previous week.
Additionally, a strong dollar adds to the negative tone surrounding the oil market. The greenback climbed decently across the board amid the resurgent safe-haven demand. USD index is changing hands above the 97.00 handle ahead of fresh economic data out of the United States due later today.
As a result, the increased oil supply in the US coupled with the above-mentioned risk factors pushed Brent crude to more than one-week lows after the rally was capped around the $44 barrier earlier this week. It is possible that the futures will resume the ascent after the current correction on the condition that risk-on tone reemerges in the days to come.
