Asia Oil: Sense of carnage after crude’s near 10% tumble

Crude prices have tumbled around 10% in the past week, in part mirroring weakness in equity markets, which in turn reflects some concerns over the demand recovery, aggravated by the conclusion of the US driving season.
 
That’s not to mention traders are waiting for the results of the post-Labor day coronavirus testing. Concerns remain elevated that the weekend’s festivities could result in a boost to in Covid-19 case numbers, which comes at a gnarly time with seasonal worries elevated as the northern hemisphere heads for colder autumn months, forcing social activity indoors where the risk of catching the virus rises.
 
The pressure late last week on oil prices continues after news that Saudi Aramco cut oil price for October delivery to buyers in the US and Asia, and following a slight uptick in the US rig count. However, the price cut is getting compounded by reports that Chinese Seaborne crude imports have fallen 5.4% in August to 10.9mb/d, down from a record high, as concerns also mount that China's storage capacity is nearing tank tops.   
 
Still, the ongoing weakness likely owes as much to broader market uncertainty as it does to any oil-specific factors. In the meantime, traders will continue to focus on OPEC+ controlling supply for support. Nonetheless, near-term risks remain in the form of sensitivity to coronavirus news and some shut-in production return. 
 
After months of a gradual low volatility melt-up, the rapid fall in prices has hit like a sledgehammer. These position clear outs are very much reflective of a market that got too far ahead of economic demand reality, which then ran headlong into the biggest seasonality roadblock of them all, the end of US peak driving season, compounded by a refinery maintenance period.
 
As for the broader markets, fundamentally, little has changed. However, the resulting stronger US dollar due to the ECB pushback plus the Fed being less likely to ease in September has weakened a very robust price pillar. The slide in the USD through much of July and August was very supportive for oil prices. The correction in risky assets that started with a turn in the EURUSD narrative bled into oil is still in play, although arguably many of the dominos on the currency side have fallen. 
 
Oil market participants, like their cross-asset colleagues, are gradually beginning to reassess the carnage. And while short term downside risks always remain, the longer-term trend still points higher for oil prices, which should offer a modicum of support at current levels.