Oil prices are declining further this week as the market is reassessing the current supply tightness as short-lived, is pricing in the possibility of SPR reserves being released by the US, and is recognizing a downside from the global spike of new Covid-19 infections.

Here is Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Louise Dickson:

The carnage on oil prices has spilled into this week as the market now seems to be less concerned about the current supply tightness, expecting it to be short-lived.

Traders are instead refocusing on the return of two bearish factors – the possibility of more oil supply sources and more Covid-19 cases.

In the US, a stronger dollar paired with calls from Congress to release SPRs onto the market adds downside spin to the very short-term outlook.

Global oil supply is still lagging behind demand, but we expect this fundamental to flip by mid-2022, which will prevent any triple-digit ascent in oil prices.

The brewing fourth wave of Covid-19 cases hitting Europe has already triggered many governments to take action and reinstate masks mandates, and in some cases, as in the Netherlands, partial lockdowns, which will inevitably weigh on oil products consumption.

More countries in Europe are set to restrict the movement of unvaccinated individuals, which is adding another roadblock for oil demand.

The oil market overall shrugged off a slew of positive indicators from China. The higher-than-expected industrial growth data and boost in refinery runs in October towards 14 million bpd should have been celebrated as bullish indicators that the days of fuel-rationing are on the way out and China.

The market is again focusing on the US, and how the Biden administration will act now that political pressure is ramping up.

The call over the weekend by Senate Majority leader and Democrat Chuck Schumer for the Biden administration to authorize the sale from the US Strategic Petroleum Reserve (SPR) has so far gone unanswered, so the market is forced to price in bearish expectations before hearing from the President himself.

A release of SPR volumes, which are mostly held in crude oil and not oil products like gasoline, would offer a reprieve to gasoline prices, but the impact would likely be mild and short-lived, according to past historical examples of sales.

A much larger impact would come from a temporary ban on US oil exports, which we do not think is an option the Biden administration will resort to.