A resurgence in Covid-19 cases in some countries could further dampen oil demand and interfere with a decline in oil inventories, Reuters has reported, citing an internal document of the OPEC+ technical panel.
Cases have been rising in many European countries, total infections in India have passed 5 million, and new cases are on the rise in some U.S. states.
Meanwhile, OPEC itself, as well as the International Energy Agency, earlier this week revised their oil demand outlook for the year. Both are now expecting a bigger contraction than they anticipated a month ago.
The IEA now expects 2020 oil demand to be 8.4 million bpd lower than it was a year ago, and OPEC sees it contracting by 9.5 million bpd. That’s up from 8.1 million bpd and 9.1 million bpd, respectively, that was forecast just a month ago.
At the same time, according to the document, global oil inventories are falling. Commodity trading giant Vitol recently chimed in with this opinion, seeing a strong reduction in oil inventories in the next three months, between 250 and 300 million barrels. Not everyone in the industry agrees, however, with Trafigura, who noted a “supply-heavy market” through the end of the year.
Meanwhile, OPEC+ has dramatically improved its compliance with the production cuts agreed in April to restore balance on the oil market. In August, sources from the cartel told Reuters, compliance hit 101 percent. The improvement followed Saudi Arabia’s threat to laggards, which include Iraq and Nigeria, with a reversal of its own cuts if they failed to fall in line and compensate for their overproduction in May and June.
Later today, OPEC+ ministers are meeting to discuss compliance levels and oil’s fundamentals amid yet another negative trend in oil prices, driven by the growing worry about demand. Iraq could complicate matters, with recent reports suggesting OPEC’s number-two may have plans to increase production the first chance it gets to boost vital oil revenues.
By Irina Slav for Oilprice.com
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There are many bullish factors currently working for oil prices. The first is the China factor which has become truly the pivot of both the global economy and the global oil market. Not only has China been breaking all previous records with its roaring crude oil imports but it is also breaking new records with its purchases of fuel blending products, suggesting that its fuel demand recovery may be more impressive than expected.
Another factor is indications that the huge glut in the market has already declined by 300 million barrels in the last three months and is projected to decline further by 250-300 million barrels between September and December according to Vitol Group, the world’s largest oil trader.
And a third bullish factor is the steep decline in US oil production calculated by me at 6.5 million barrels a day (mbd) or 50% of total US production so far this year.
Therefore, OPEC+ should continue with its disciplined compliance with the production cuts and sit tight waiting for oil prices to rise which they will definitely to $45-$50 a barrel before the end of 2020 and hit $60 in early 2021.
Moreover, OPEC+ is very well advised not to take seriously the International Energy Agency’s and BP’s gloomy projections about global oil demand because they are mostly politically-motivated.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London