The oil market has already priced in the slowing global demand recovery and the growing uncertainties about the economy amid resurging coronavirus cases in many parts of the world.
Analysts largely concur that oil prices are not expected to move much higher than current levels of around $40 a barrel until the rest of the year, because of still high excess global inventories and the stalled recovery in oil demand with the end of the U.S. driving season and the continued trend of rising COVID-19 cases, especially in major European economies, which have started to re-impose some restrictions to curb the spread.
Yet, despite the bearish fundamentals and the headwinds coming from the so-called second wave of infections, oil prices are unlikely to crash again as they did in April when oil demand collapsed by 20 percent, Michael Lynch, an expert on petroleum economics and energy policy, writes in Forbes. At the same time, even if we don’t see oil prices in the teens again this year, the risks and uncertainties on the markets continue to be skewed to the downside, leaving little room for price gains for the remainder of 2020.
Oil prices are in for a range-bound trade in the coming months, with volatility expected around the U.S. election in early November, most analysts say. All in all, oil is set for lower-for-longer in the near term, but with little chance of crashing again to below $35 a barrel.
While the persistent coronavirus and the resulting slow economic and oil demand recovery continue to put downward pressure on oil prices, the OPEC+ production cuts and the decline in U.S. oil production have managed to put a floor under prices.
Related: Libya’s Oil Production Jumps To 300,000 Bpd As Exports Rise At least for now, no one expects simultaneous widespread national lockdowns around the world that could crush demand as they did in April.
Europe, as well as the U.S., are battling the second wave, which is set to exacerbate with the flu season this fall and winter.
This second wave is likely to further stall the recovery in oil demand, which started to falter at the end of the summer, with fuel consumption in the United States and other mature economies flattening at around 10 percent below last year’s levels.
Despite the fact that some restrictions are being re-imposed in many places and local lockdowns return in the UK and Spain, the major economies are abstaining from national lockdowns.
More restrictions could slow the economic recovery, and by extension, the oil demand recovery, setting the stage for lower-for-longer oil prices, but with dips into the teens unlikely.
Until an effective vaccine is rolled out “large uncertainties and risks will continue to destabilize the oil market and affect the pace of economic recovery,” OPEC Secretary-General Mohammad Barkindo said last week.
In the U.S., gasoline demand recovery stalled at the end of the driving season.
Related: The World’s Most Controversial Oil Frontier Falls Out Of Favor With Big Banks
“The plateauing in demand is a symptom of the continuing aggressiveness of the coronavirus and is telling us that it will take longer to get back to normal,” IHS Markit vice chairman Daniel Yergin said in early September.
The faltering oil demand recovery and the lack of a COVID-19 vaccine will likely push the oil price recovery to $50 a barrel into 2021, as inventories continue to pile up in 2020 amid weak refinery margins and demand, Ole Hansen, Head of Commodity Strategy at Saxo Bank, said last month.
“The current range-bound trading behaviour highlights a market that remains torn between short-term weakness against the expectations for a recovery, the timing of which, however, continues to be delayed,” Hansen said earlier this week.
The monthly Reuters poll showed last week that dozens of analysts do not see much upside for oil this year due to uneven demand recovery, while 10 investment banks surveyed by The Wall Street Journal don’t expect oil prices to return to $60 a barrel – the level before the pandemic crushed demand and prices – by the end of 2021. The banks expect prices to average above $50 a barrel in the fourth quarter of 2021, but they don’t expect WTI Crude prices to rise to $51-55 per barrel until 2022.
The market may not see oil at $20 a barrel over the next year, but prices are unlikely to return to pre-coronavirus levels in 2021 either.
By Tsvetana Paraskova for Oilprice.com
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The price and demand recovery will rely heavily on the virus situation. It's hard to predict whether any effective vaccine would be discovered and distributed in 2021.
Two bearish influences are still at work. The first is the size of global oil inventories. Though these have declined to 700 million barrels, their decline is slow but sure. The second influence is fears of a resurgence of the pandemic. However, these fears are exaggerated because the world isn’t going to revert to the huge lockdowns it had early on and also because countries of the world are now far more experienced and prepared and better equipped than before to deal with the pandemic. Moreover, anti-COVID vaccines will very shortly be available.
Still, two major bullish influences are putting a solid floor under prices and supporting them. The first is China’s spectacular rebound and its roaring crude oil imports. The second is the steep decline in US oil production amounting to 6.5 mbd or 50% of the claimed production. The EIA has recently and grudgingly admitted to a decline of 3 mbd from its claimed 13 mbd to 10 mbd.
For these reasons oil prices are unlikely to collapse again.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London