Despite a moderate price rebound on Wednesday, oil markets have been under significant pressure since last week.
Brent prices closed the week at $42.66, down by 6.88% w/w, while WTI closed at $39.77, down by 7.45% w/w, the largest weekly drop since June. The production recovery in the Gulf of Mexico, which was hit by hurricane Laura, caused a shift in sentiment. Next to this, uncertainty about OPEC+ compliance and rising OPEC+ supply in August has contributed significantly to the price decline. Iraq may be asking for an additional two-months extension to compensate for missed production quota.
Furthermore, statements from Russian Energy Minister Novak regarding the need to boost OPEC+ production has sparked concerns over the continuity of the OPEC+ agreement, which continues to be one of the major pillars in a period of fragile demand recovery. Additionally, the unemployment figures published by the US Bureau of Labour Statistics (BLS) showed that the US unemployment rate marginally declined to 8.4% in August compared with 10.2% in July, which accelerated the selloff of crude oil contracts starting last Wednesday. In response to these bearish factors, Saudi Aramco has slashed its Arab light oil prices to Asia by $1.40/bbl against prices of Dubai/Oman crudes which points at weaker demand in Asia.
Uncertainty over China’s imports
China’s economic recovery has been a major driver for global markets. The latest data shows that China's PMI rose to 53.1 in September, from 52.8 in August, which is the highest growth since Jan 2011. However, slowing Chinese crude oil imports in September and October compared with its record imports in May and June has strengthened bearish sentiment last week. The dip could result in a 40% decline in crude imports as private refiners are reaching their full state-assigned quota. China’s crude oil imports in August stood at 11.18 million bbl/d, down by 0.90 million bbl/d m/m. Rising refined product stocks in China add additional pressure as refiners struggle to find overseas buyers. Complicating matters even more, the border dispute between China and India continues to be a factor affecting exports of Chinese petroleum products.
OPEC compliance in August is said to stand at 106%
CMarkits understands four producers within the OPEC+ alliance submitted their proposal last week, of which two pledged additional cuts of 400 thousand bbl/d (Iraq) and 94.5 thousand bbl/d (Kazakhstan) in August and September. Related: Trump's Drilling Ban Bombshell Rocks Oil Industry
Initial reports, from Energy Intelligence, show that the OPEC-10 total compliance reached 106% in August. That includes a compliance rate of 141% for Iraq, whose production is said to stand at around 3.46 million bbl/d in August compared with 3.76 million bbl/d in July. Furthermore, Nigeria’s compliance is also said to have reached 130% in August, which suggests that its production in August stood at 1.395 million bbl/d compared with 1.36 million bbl/d in July. The cuts made by Iraq and Nigeria in the month of August stood at 1.19 million bbl/d and 0.43 million bbl/d, respectively. Iraq is said to be asking for a two-month extension, October-November, to deliver its pledged targets in case it does not deliver them by the end of September. Although the figures are very promising, their impact on markets has been so far negligible.
The UAE has reduced its crude deliveries to Asia by 30%, yet its production compliance fell below 100% in August, 82%, mainly due to its need to produce sufficient amounts of associated gas to meet its power demand during the hot summer months.
OPEC+ expects additional cuts of 1.15 million bbl/d in August and in September, which if effectively implemented may lead to total cuts of 8.85 million bbl/d, instead of 7.7 million bbl/d as agreed by the alliance. Yet, if crude demand remains weak, CMarkits expects OPEC+ to restore its previous cut agreement, which may be the main subject of discussion when the group meets again on September 17th.
Bullish EIA data failed to push prices
The EIA reported bullish figures last week, showing a decline in U.S. commercial oil inventories, which fell by 9.40 million barrels w/w to stand at 498.4 million barrels. This was combined by a simultaneous decline in gasoline and middle distillates inventories which fell by 4.3 million barrels and 1.7 million barrels, respectively. On the other hand, the impact of hurricane Laura hurricane shut-ins was also clearly visible in the EIA report. U.S. refinery runs declined by 0.84 million bbl/d w/w to stand at 13.87 million bbl/d. Furthermore, the hurricane caused a weekly drop in U.S. oil production, which fell by 1.10 million barrels per day w/w to stand at 9.7 million bbl/d, which is 2.7 million bbl/d below its level last year. The decline in crude oil inventories in the United States is expected to slow over the coming weeks due to the end of driving season.
By Yousef Alshammari for Oilprice.com
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From the start, I projected that global oil demand will end 2020 at 96 million barrels a day (mbd), just 5 mbd short of pre-COVID pandemic levels of 101 mbd.
With aviation fuel accounting for 7.8% or 7.89 mbd of global oil demand and with air travel at 45% level currently, there is a loss of 4.34 mbd of oil demand. And with road travel virtually back to pre-pandemic levels, a lot of ado is being made about global oil demand souring or stalling.
The fundamentals haven’t changed recently. China is still leading global oil demand by its roaring crude oil imports. If the imports have slowed a bit recently, it is because China is waiting to offload the numerous tankers waiting in Chinese ports and also to determine available storage capacity before re-embarking on its record-breaking imports.
Furthermore, China’s economy is still surging ahead and is projected to grow at 6.8% in 2021 according to the IMF compared with 6.1% in 2019. Most of the weakness in the global economy currently emanates from the sad state of the US economy. Still, the US economy is a vibrant one and will soon recoup all its losses as a result of the COVID-19 pandemic.
Moreover, a vaccine could be with us before the end of the year or in early 2021.If the Russian vaccine proves effective against the Russian people in October, it could be made available to the world shortly after.
There no need for OPEC+ to increase its production cuts beyond the current ones as this could lead to more loss of its market share. It is enough to continue to comply fully with the current ones.
Based on the above, global oil demand could be back to pre-pandemic levels by the end of 2021 if not slightly earlier. Moreover, oil prices could be expected to hit $45-$50 a barrel before the end of 2020 and touch $60 in early 2021. Prices will continue to be underpinned by the steep decline in US oil production estimated at which I estimate at 6.4 mbd as a result of the pandemic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London