Rigs were poised for return. Vaccines were in arms. Then oil rally stumbled.

Oil prices failed to rise week over week for the first time since October after a new coronavirus strain prompted governments around the world to impose tough, new lockdowns that could halt the recent hike in demand.

West Texas Intermediate, the U.S. benchmark, declined by 1.8 percent this week, settling Thursday in New York at $48.23 a barrel. Markets are closed Friday for Christmas. The decline snapped a nearly two-month rally driven by rising investor optimism after the rollout of COVID-19 vaccines and the promise they held for a return to normal economic activity.

After a mutated version of the coronavirus was reported in England, several countries banned flights from the United Kingdom. Meanwhile, U.S. health officials urged Americans to celebrate the holidays at home as the number of COVID-19 cases rises in most places in the country.

“Any setback in combating the pandemic is met with selling, as we saw this week,” John Kilduff, a partner at Again Capital, told Bloomberg. “Demand in the early part of January is looking shaky, especially if more lockdowns come our way, which is increasingly likely if a post-Christmas surge in virus cases materializes.”

Uncertainty in oil markets is bolstered by fears that the U.S., OPEC and its allies, and even Iran could open the pumps and flood the world with crude at the first sign of growing demand.

“There are more downside risks going forward than upside tailwinds for the energy markets,” Tariq Zahir, managing member of the global macro program at Tyche Capital Advisors, told Bloomberg. “We have already seen downward revisions for oil demand going into next year and with OPEC wanting to start to add production,” demand may weaken further.

Meanwhile, the number of operating rigs in the U.S. is at its highest level since May and is evidence that the nation’s producers are ramping up output.

Oil and gas producers added two rigs this week after a surge of eight in the previous week and 15 in the week before. The U.S., with 348 operating rigs, has added more than 100 since the count bottomed out in August, according to Houston oil-field services company Baker Hughes and energy data firm Enverus.

The figure, however, is 57 percent less than the 805 operating rigs the nation had a year ago. Karr Ingham, a petroleum economist for the Texas Alliance of Energy Producers, said that he expects the rig count to continue rising next year, but warned recovery will take time.

“We’ve added over 100 rigs nationally and well over 50 rigs in Texas, but we’re adding to these numbers off of really strong losses in 2020,” Ingham said. “Oil prices may well get back to pre-pandemic levels in 2021, but I’m not sure there’s a plausible scenario for the rig count to get back in 2021.”

Source: houstonchronicle.com

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