Oil prices are again holding up their 40+ dollar levels this morning, trading only marginally down, but maintaining relatively healthy levels under the circumstances.

Today’s marginal losses are to be expected, as deteriorating market confidence continues to manifest itself through a boost in safe-haven flows, especially gold.

In lack of larger fundamental news, oil prices are following the overall macro trends, behaving as a “risky asset” and being traded lower when safe-haven assets strengthen. 

Some Covid-19 pessimism is still around and news of uncomfortably high new coronavirus cases in key US states and new cases in China and Hong Kong this morning add fuel to the fire of sentiment woes.

But oil prices are still holding up fairly well, if one thinks of the market conditions.

A wild card is also how US-China tensions will evolve, will the current spat end with the closure of the two consulates or will trade be affected. Traders are pricing in some downside from this as if the political rift escalates oil demand could take a hit from its rollover consequences to fuels use.

Overall, the market seems though to be priming itself for a short-term correction, but we’re left waiting for the proper bearish impetus factor to arrive. At the same time, the market is showing signs of resilience by shrugging off one bearish piece of news after the other.

The biggest bear in the bushes is of course how US oil demand will react to the surge of Covid-19 cases. The actual demand for crude oil from the world’s largest consumer, going into the peak of the refining season, dipped for the second week in a row led by the East and West Coast refineries.

Moreover, the trend for Covid-19 cases will likely soon result in downwards revisions in demand growth forecasts, especially for 4Q20, we believe. This may come back to haunt the bulls sooner rather than later as expectations are adjusted for the worse.

Looking at the bigger picture, It is becoming increasingly unsure that the market can take the additional volumes from OPEC+ from August without negative consequences for price and time spreads.

Especially if it causes a mini-supply glut during Sep-Oct-2020. Rystad Energy incorporated last week a mild second Covid-19 wave into its base case, amending its oil demand forecasts, as we now see the pandemic muting demand growth through October.