​Oil trades near $42 amid U.S.-China tension and weaker dollar

Oil approached $42 a barrel as investors weighed worsening relations between Washington and Beijing alongside the continued slide in the U.S. dollar.

Futures in New York edged higher after a 1.7 per cent gain last week. Chinese authorities took over the U.S. consulate in Chengdu on Monday as tit-for-tat tensions continue to simmer between Beijing and Washington. At the same time, second waves of coronavirus are emerging from Spain to China, casting fresh doubts over the demand outlook, while the dollar continued to slump.

The most notable market moves in recent days have come in the shape of the oil futures curve. Brent’s prompt spread is trading in its largest contango structure since May, a sign of oversupply, while contracts based on the value of Russian and North Sea crudes were both weaker last week. It’s the latest signal that market re-balancing may have paused.

Crude has been trading in a tight range near $40 a barrel since early June after its rapid recovery from lows in April petered out as many countries struggled to bring the virus under control. A drop in the U.S. dollar has also supported prices this month, although investors are bracing for fresh supply from the OPEC+ alliance when it relaxes its output curbs from August.

“On the one hand, the risks of a less robust recovery of demand due to coronavirus, and the political tensions between the U.S. and China, are weighing on prices,” said Commerzbank AG analyst Carsten Fritsch. “On the other, prices are finding support from the weak U.S. dollar and hopes of further corona aid.”

Prices
  • West Texas Intermediate for September delivery rose 0.7 per cent to $41.60 a barrel as of 13:31 p.m. in London
  • Brent for September settlement added 0.7 per cent to $43.65

The pace of the recovery in global oil demand is set to slow to below one million barrels a day from August through December, Goldman Sachs Group Inc. analysts wrote in a report. That stalling return is likely to leave crude prices range bound in the second half of the year, they said.

There is also evidence North American crude production may be starting to recover. U.S. output rose for the first time since March in the week through July 17 after correcting for the impact of Tropical Storm Cristobal, which tore through the Gulf of Mexico in June, while Baker Hughes Co. data released Friday showed the first expansion in drilling in American fields in four months.

© 2020 Bloomberg L.P.

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