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Are Oil Bulls In For A Disappointing July?

The oil market continues to tighten, but the surge of coronavirus cases in the U.S. could derail the rally in crude prices.  OPEC+ can claim most of the credit for engineering an oil price rally, keeping upwards of 9.7 million barrels per day (mb/d) offline for several months. The one-month extension through July added to the effort, as did the improved compliance. “Although there is still the danger of demand outages in view of increased new cases of Covid-19, OPEC+ seems to have the market under control at the moment,” Commerzbank wrote in a note on Wednesday. 

The resurgence of demand has also boosted prices, despite the fact that demand remains significantly impaired relative to pre-pandemic levels. A smaller oil market has “rebalanced” and might even trade at a deficit for the remainder of 2020. 

But the coronavirus continues to spread like wildfire in the U.S., Brazil, and India. The U.S. posted 48,000 new Covid-19 cases on Tuesday, a record high. Dr. Anthony S. Fauci, the nation’s top infectious disease expert, warned that cases could top 100,000 per day if the current rate of infection is not slowed. 

In the oil capital of Houston, ICU capacity is at 97 percent. Meanwhile, a total of 38 states now have an Rt value of over 1.0, meaning that each infected person is infecting more than one additional person – a sign that the spread is accelerating.

At least 19 states have paused or rolled back their reopening plans. New economic data shows that the nascent rebound has stalled in much of the country, and is now going into reverse.

Raymond James downplayed the significance of new closures in terms of its effect on the oil market, calling new shutdowns “geographically localized.” 

In a global context, the trend is still broadly moving towards reopening, the bank said. “While it is understandable that these stories are played up by the media, the fact of the matter is that these occurrences are essentially noise against the overarching backdrop of re-opening that continues to advance, so far,” Raymond James analysts wrote in a note. The bank noted that of the 4.31 billion people that lived under some version of a lockdown in recent months, 3.56 billion are in areas that have now reopened, or 83 percent. 

Related: Oil Rallies On Bullish EIA Inventory Data

Others see more trouble ahead. Although the oil price rally has stalled at about $40 per barrel, “the downwards correction could justifiably have been greater” due to the renewed spike in Covid-19 cases in the U.S. and the potential negative impact on demand, Standard Chartered wrote in a report. 

“[W]e remain wary of the sustainability of apparent increases in gasoline demand, as record-high new coronavirus cases in the top three gasoline-consuming US states (California, Texas and Florida) raise  demand risks, and are at odds with recent market commentary based on a V-shaped recovery,” Standard Chartered said. 

“Record-high inventories, increasing risks to demand, and the potential rapid return of shut-in production suggest to us that price recovery has run far ahead of what data trends can support, and that the longer oil prices take to correct lower, the larger that correction will likely need to be,” the bank added.

Standard Chartered also said that China’s strong oil import demand in recent weeks has less to do with a sharp recovery than it does with “bargain-hunting in crude oil after the collapse in prices.” Commodity markets are “unlikely to be powered by a V-shaped recovery in import demand from Asia ex-China.” 

A few other negative factors are worth keeping an eye on. OPEC+ is leaning towards relaxing the production cuts at the end of the month, potentially returning 2 million barrels per day to the market. Although nothing has been decided, sources told Reuters that the production cuts could ease from 9.7 mb/d to 7.7 mb/d as soon as August. 

Libya – which is not participating in the OPEC+ agreement – may also return some supply to the market. The bulk of the country’s output has been offline during the past year due to the civil war, but the failed siege on Tripoli by the Libyan National Army has led to negotiations and the potential restart of oil terminals. 

Meanwhile, Saudi Arabia has threatened a new price war if Angola and Nigeria do not up their compliance with the production cuts, according to the Wall Street Journal.

For now, though, oil traders are ignoring most of these bearish signals. The EIA reported a strong draw in crude inventories for the week ending on June 26, leading to price gains during midday trading on Wednesday. 

The EIA data will likely lead crude benchmarks “to keep their gains,” and the enthusiasm could “stay for a while, with traders longing for the next bunch of positive news,” Rystad Energy’s oil markets analyst Louise Dickson said in a statement. However, Dickson noted a rather large caveat in the next sentence. 

“Keep an eye on Covid-19 though and how reported infections increase in the US and beyond, that’s the Joker in the oil card deck,” the analyst said. 

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on July 02 2020 said:
    Judging by the current momentum in the global oil market and the way China is leading both the global economy and the global oil market out of the COVID-19 pandemic, oil bulls will continue to underpin oil demand and prices far beyond July.

    Moreover, we shouldn’t exaggerate fears of a second wave of the pandemic as countries of the world are now more prepared, better equipped and more experienced in dealing with it.

    As for Libya’s return to the global oil market, since 2011 Libya’s oil production has become a footnote on the global oil market and long interruptions of Libya’s production have become the norm. So the impact of new Libyan oil is virtually negligible. That is why OPEC+ has exempted Libya from any production cuts.

    OPEC+ production cuts will continue at the level the global oil market needs. Furthermore, the claim by Standard Chartered that China’s strong oil import demand in recent weeks has less to do with a sharp recovery than it does with bargain-hunting in crude oil is erroneous. China won’t be importing so much crude oil if its economy doesn’t need it. Circumstantial evidence confirms this. China’s economy is projected to recover to pre-pandemic level by the end of this year and is projected to grow at 6.8% in 2021 according to the International Monetary Fund (IMF) compared with 6.1% in 2019.

    That is why I am projecting oil prices ranging from $45-$50 a barrel in the second half of this year and touching $60 in early next year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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