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6 Key Factors That Could Cause Another Oil Market Crash

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The crash in demand engineered by the unprecedented steps to contain the coronavirus hit the oil industry hard, whipsawing stocks and futures. But it seems that crude’s worst losses are in the rear-view mirror with signs of gradual rebalancing. In fact, WTI crude — the U.S. benchmark — traded at around $40 a barrel Thursday, marking a stunning rebound from its record low on Apr 20, when the commodity settled at minus $37.63 a barrel.

While oil prices have come a long way from the depths of coronavirus-induced mayhem, lingering signs of weakness are still evident. The market remains fragile and besieged by the risk of being undone by certain factors.

Here's a rundown of six different crash catalysts that could contribute to another sell-off in oil.

Continued Pressure on Demand: Commercial passenger flights remain seriously curtailed. In particular, the usage of distillates such as aviation fuel continues to be weak with air travel essentially grounded. As long as the coronavirus outbreak continues unabated (as is now the case in India and a second wave across Europe), there will be pressure on the demand side of the equation. Per the International Energy Agency (“IEA”), the degree of recovery in oil consumption is expected to decelerate during this quarter and driven by localized lockdowns and containment measures to tackle the recent increase in COVID-19 cases.

Weak Gasoline Recovery: Even though gasoline consumption has improved from their pandemic lows, they remain weak. As proof of the bearish environment, downstream operators including PBF Energy (PBF - Free Report) , Valero Energy (VLO - Free Report) and Phillips 66 (PSX - Free Report) have drastically reduced processing capacity. Refinery utilization in the United States remains far below the usual capacity usage at this time of the year. As it is, during the August-October period, the U.S. refining network in the Gulf Coast experiences regular drops in utilization due to the impact of hurricane shutdowns. Moreover, with the onset of the refinery maintenance season, traders expect the glut to worsen.

Increase in Permian Activity: Per the latest edition of the EIA’s Drilling Productivity Report, crude production in America’s biggest oil field — Permian Basin in the western part of Texas and the south-eastern part of New Mexico — is expected to rise by 23Mbbl/d month over month to 4,173 Mbbl/d in October, indicating the second-straight monthly increase. The likes of Parsley Energy and Zacks Rank #2 (Buy) Pioneer Natural Resources (PXD - Free Report) have already brought some previously shut-in production back online. This will offset the output curbs elsewhere and weigh on the outlook for prices.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S.-China Flare-Ups: The latest feud is related to the control of popular video app TikTok, which is owned by ByteDance, a Chinese firm. The deteriorating relations between the world’s two largest energy consumers cast a pall over the nascent oil recovery. For the record, China is the world's largest crude importer and the second-biggest oil consumer behind the United States. While it was confirmed that President Trump would continue with the Phase 1 trade agreement with Beijing, a protracted dispute between the world’s two top economic superpowers could spook the oil market again.

Additional Barrels from Libya: The resumption of supply from Libya, an OPEC+ member that is exempt from production caps, has added to the bearish sentiment in the market. The North African country is set to reopen its oil industry after months of civil war-led shutdown. This means more output hitting the already oversupplied market at a time of mounting demand concerns.

Stimulus Doubts: Meanwhile, the Federal Reserve’s view of the American economy remains cautious with the central bank warning that the fragile recovery could falter in the absence of further stimulus. With no progress in talks between Democrats and Republicans, the chances of any imminent package look unlikely. This might dent crude’s support level further.

Conclusion

Oil prices have staged a remarkable comeback after falling into a deep abyss in April. But there is more than one instance over the past few years that the commodity’s run-up has been short-lived due to one or the other reason mentioned above. Therefore, investors must exercise caution while buying oil company shares.

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