Oil markets are spiraling downwards as bearish factors mount and sentiment shifts. One of these factors is the concerns over rising exports from OPEC+ in Q3, with the possibility of a total breakdown of the OPEC+ agreement. Another factor is the possibility of a Joe Biden election victory in the US, which could lead to the lifting of sanctions on Iran and the removal restrictions on Iranian crude oil exports. Joe Biden is ahead of Donald Trump in most national polls. Furthermore, the market has been weighed down by concerns that oil demand recovery is slowing due to a resurgence of coronavirus infections globally. COVID-19 cases are rebounding in the UK and France, with the number of daily cases reported exceeding 3 thousand cases in the UK and 10 thousand cases in France. The uptick in cases has increased the likelihood of another lockdown being implemented across Europe. With increasing crude stocks and low refinery runs signaling weak demand, the markets are expected to remain under pressure. Last Friday, Brent closed at $39.83, down by 6.63 percent w/w, while WTI closed at $37.33, down by 6.14 percent w/w. Money managers reduced their net long positions by 57.39 million barrels w/w in WTI contracts to stand at 269.49 million barrels while reducing net long positions in Brent contracts by 67.31 million barrels w/w to stand at 121.17 million barrels. It seems that poor fundamentals are now having a significant impact on market sentiment.
EIA reports a rise in crude inventories with declining refining runs
The EIA reported an unexpected rise in crude oil inventories by 2 million barrels to stand at 500.4 million barrels, while the strategic petroleum reserve declined by 0.3 million bbl/d to stand at 647.3 million bbl/d. There was a withdrawal from gasoline and middle distillates inventories and a decline in refinery runs which went down by 1.09 million bbl/d w/w to stand at 12.78 million bbl/d as the driving season ended in the U.S. The decline in refinery utilization during Hurricane Laura last week was largely responsible. Gasoline inventories were down by 2.95 million barrels, while distillate stocks decreased by 1.68 million barrels. The EIA data suggests that U.S. oil demand stands at 15.26 million bbl/d, down by 0.51 million bbl/d w/w. The U.S. oil production rose by 300 thousand bbl/d to stand at 10 million bbl/d after a partial recovery from the disruption caused by Hurricane Laura.
Related: Citi Bank Sees $60 Oil In 2021
Hurricane Sally to create another supply concern in the USGC
This week, the Gulf of Mexico, which produces around 17 percent of the U.S. oil production, may have another supply disruption as Hurricane Sally, which is a category 2 hurricane, is expected to dump between 6 to 12 inches of rainfall from Western Florida to Southeast Louisiana. Both Chevron and Murphy Oil started evacuating their offshore platforms, while Chevron's Pascagoula refinery is implementing a storm preparation procedure. The hurricane is likely to cause U.S. production from the Gulf of Mexico to dip once again.
Iraq compliance improving despite poor data from Kurdistan
OPEC+ is holding its meeting this week, on the 17th of September, where producers are expected to review compliance. Most analysts expect the group to stick to the production agreement throughout Aug-Dec 2020, easing cuts to 7.70 million bbl/d, from 9.7 million bbl/d.
The latest data reported by Iraq's state oil marketer, SOMO, shows that Iraq’s production in August averaged 3.578 million bbl/d including 456 thousand bbl/d from Kurdistan. That is 174 thousand bbl/d above its quota of 3.404 million bbl/d. Compliance has improved since July when Iraqi production averaged 3.697 million bbl/d. According to SOMO, Kurdistan achieved compliance of 79 percent while the federal state’s compliance hit 102 percent. The total August crude oil exports from Iraq stood at 3.023 million bbl/d, including 2.597 million bbl/d from the federal state and 426,000 b/d from Kurdistan. The conflict between the federal government and semi-autonomous Kurdistan continues to affect Iraq’s compliance figures. Iraq will now ask for an extension to achieve its compensation plans in October and November.
EIA slashes its demand forecast to 8.32 million bbl/d
Oil market reports from the IEA and OPEC are expected to be released this week in which demand forecasts will likely be altered. The EIA released its STEO last week in which it slashed its demand growth forecast by 0.21 million bbl/d to a total decline of 8.32 million bbl/d y/y, due to lower than expected consumption growth in China. That means the EIA expects an average demand of 93.1 million bbl/d in 2020 with an expected rise in demand by 6.5 million bbl/d in 2021. In its forecast, the EIA assumes that U.S. GDP will have declined by 4.6 percent in the first half of 2020. The EIA estimates that global oil demand averaged 94.3 million bbl/d in August, which is 1 million higher than our forecast published a few months ago. Furthermore, the EIA expects U.S. crude oil production to average 11.4 million bbl/d in 2020 and 11.1 million bbl/d in 2021, compared with 12.2 million bbl/d in 2019 which suggests nearly flat levels this year and next due low price expectations.
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By Yousef Alshammari for Oilprice.com
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Analysts, investment banks and oil traders have been making a lot of ado about the recent decline in oil prices when in fact the global oil fundamentals haven’t changed from a week ago. Therefore, I am treating it as a mere hiccup.
It is true that the UAE increased its crude oil exports in August thus causing OPEC+ exports to rise slightly, the rise should be judged on the basis of average OPEC+ exports over a number of months. Furthermore, cohesion of OPEC+ is still strong and its compliance with the production cuts very disciplined on the whole. A total breakdown of OPEC+ agreement could only happen if Saudi Arabia decides to start another oil price war. But I am of the opinion that Saudi Arabia has learnt a very crucial lesson from its oil price war against Russia and ended up paying a very heavy price.
And while the world wants to see the back of President Trump in November, his chances of winning the presidential elections are in my opinion far better than his rival Joe Biden.
Were Biden to win the elections, he may ease tensions with both China and Iran but he will never lift sanctions against Iran.
There are two major bullish influences at work currently putting a solid floor under oil prices. One is the China factor. If Chinese crude oil imports have slowed down marginally during August, 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.
The other is the steep decline in US oil production (shale oil) by an estimated 6.4 million barrels a day (mbd) as a result of the pandemic though the US Energy Information Administration (EIA) only admits to 2-3 mbd of decline. Moreover, global oil demand is projected to end the year at 96 mbd, just 5 mbd short of pre-COVID pandemic levels of 101 mbd.
Based on the above, global oil demand will be back to pre-pandemic levels by the end of 2021 if not earlier. Moreover, oil prices could be expected to hit $45-$50 a barrel before the end of 2020 and touch $60 in early 2021.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London