Market sentiment has been generally bullish over the last week supported by (i) supply disruption caused by Hurricane Sally in the Gulf of Mexico (ii) a draw in commercial crude oil inventories by 4.4 million barrels w/w and (iii) strong language coming from OPEC+ during the JMMC meeting last Thursday, during which Saudi Arabia pressured members to boost compliance to output cuts.
The supply disruption in the Gulf of Mexico reached around 497 thousand bbl/d. Yet, it is reported that supply will soon return as the hurricane has passed the oil production area while being downgraded from category 2 to a tropical storm. Next to the production outages, fuel demand in the affected areas is likely to have been disrupted, at least for a couple of days. Gulf of Mexico drillers, however, are already preparing for a new storm as Beta is approaching fast, potentially leading to another supply outage in the Gulf.
Renewed assurance from OPEC+
The OPEC+ JMMC meeting last week resulted in an extension for compensation cuts until the end of December, as many countries asked for more time to make the required output cuts. Despite the fact that Iraq has been fully compliant in August, it has not delivered its missed targets in the previous months yet. Furthermore, the UAE, Russia and Nigeria have achieved compliance rates of 74%, 95%, and 78%, respectively, according to Platts.
The overall conformity level in August was 101% according to OPEC secondary sources. Overproduction amounted to 1.641 million bbl/d, from the OPEC-10 countries and 0.734 million bbl/d from the non-OPEC countries leading to a total of 2.375 million bbl/d in overproduction between May-August. OPEC didn’t decide to change the output cut pact at this meeting. The current agreement includes cuts of 7.7 million bbl/d, Between Aug-Dec, down from 9.7 million bbl/d, between May-July. Related: Saudi Prince Warns Short Sellers Not To Bet Against Oil
The group is scheduled to relax its cuts further to 5.8 million bbl/d starting from Jan 2021. Currently global demand is slowly recovering, with strong Chinese imports leading the way. Global demand levels in August are around 6 million bbl/d below 2019. Chinese refining runs rose to 14 million bbl/d, up by 9.2% y/y, according to the National Bureau of Statistics, despite weak refining margins. Yet, high oil inventories in China and shrinking crack spreads are leading to softer imports in September.
Libya to restart crude exports
The market is bracing for extra supply from Libya as LNA General Haftar announced the lifting of an oil export blockade that lasted for about eight months. The blockade cut Libyan oil supply from 1.1 million bbl/d, in 2019, to less than 0.10 million bbl/d in 2020. The National Oil Company confirmed that it will start production from fields that are free of Russian mercenaries and other militants. The distribution of revenues and fears of supporting armed militias resulted in a $9.8 billion loss, blackouts and fuel shortages in the country.
The first exported cargoes are expected to come from the Arabian Gulf Oil Company which produces around 0.29 million bbl/d which is predominantly exported through the Hariga port on the east coast. Production is not expected to reach capacity anytime soon as the country's oil industry suffers from major infrastructure issues. The OPEC+ agreement excludes three OPEC member countries; Iran, Libya and Venezuela, which leaves Libya with no restrictions on its production. Market reaction will depend on the strength of the economic recovery which may absorb extra supplies.
OPEC and IEA slash their demand forecast
The IEA and OPEC have slashed their demand forecast in 2020, projecting a decline by 8.4 million bbl/d and 9.5 million bbl/d respectively. OPEC and the IEA expect oil demand to average 90.2 million bbl/d and 91.7 million bbl/d, respectively, while our forecast stands at 90.35 million bbl/d. The EIA reported a decline in commercial crude oil inventories by 4.4 million barrels to stand at 496 million barrels. Domestic US production rose by 0.9 million bbl/ and now stands at 10.9 million bbl/d supported by a return of production in the Gulf of Mexico. U.S. oil demand now stands at 15.90 million bbl/d, up by 0.64 million bbl/d w/w.
In the meantime, demand continues to recovers in most key crude markets. Citi bank reported its forecast last week, and sees $60 price for Brent in 2021, assuming a full return to pre-crisis demand levels by the end of 2021. Yet, our latest forecast predicts a price of $45 by the end of December, $5 less than our previous forecast. Furthermore, our forecast for next year estimates an average price of $50 in H1 2021 and $52.5 in the H2 2021, assuming a partial return of aviation fuel demand leading to an average demand of 95 million bbl/d in 2021. We do not expect demand to return to its pre-crisis levels until 2023.
By Yousef Alshammari for Oilprice.com
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Moreover, bullish factors far outweigh bearish ones. That is why oil prices are headed upwards slowly but surely.
The first and ever present bullish factor is China’s rebound which has been the single most important factor boosting both the global economy and the global oil market. The second important factor is the accelerating depletion of the global oil inventories. They declined by 300 million barrels in the first half of 2020 and are projected to decline further by 250-300 million barrels between September and December according to Vitoil, the world’s largest oil trader.
A third factor is the steep decline of 6.5 mbd or 50% in US oil production (overwhelmingly shale oil) despite claims to the contrary by US Energy Information Administration (EIA). If anybody is wondering how I have come by that figure, I will calculate it for you.
Baker Hughes’ oil rig count is the litmus test. The EIA was claiming that US oil production before the COVID-19 pandemic was 13 mbd when the oil rig count was 744 rigs. Since then rigs according to Baker Hughes have declined to 172. This means that shale oil production which accounts for more than 65% of total US oil production currently amounts to 1.95 mbd. Adding a conventional oil production of 4.55 mbd will give a US production of 6.5 mbd meaning that the US oil industry has lost half of its production. And yet, the EIA is only admitting the loss of 2 mbd from 13 mbd to 11 mbd.
A fourth bullish factor is OPEC+ production cuts which are doing their bit underpinning oil prices. All OPEC+ has to do is to persevere with its disciplined compliance of the cuts and ensure that other laggards do likewise.
A fifth factor is a growing likelihood that vaccines will become widely available soon with the Russian vaccine being used to inoculate the Russian people in October.
Libya’s announcement that it will restart crude oil production from certain fields will hardly impact oil prices or global oil supplies since whatever Libya produces next will go towards meeting domestic needs of the country.
What is behind the occasional price slide is a manipulation of oil prices by investment Banks, financial institutions and oil traders for the sake of making profits.
Even Saudi Energy Minister Prince Abdulaziz bin Salman was provoked to issue a stern warning to short sellers not to bet against the price of the commodity saying “We will never leave this market unattended. I want the guys in the trading floors to be as jumpy as possible. I’m going to make sure whoever gambles on this market will be ouching like hell.”
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
Oil relied on China demand recovery but we know that their import is slowing down as they run out of inventory. China economy still rely on export as well and as for now the world economy hasn’t fully recovered yet. And we see now that there is possibility of second wave coming in Europe and even US is still in first wave.
We can try to be optimistic about demand recovery but at the end of the day any forecast is just a speculation. This will not be business as usual anymore for oil.