The main oil benchmarks fell below $40 a barrel again this week as clouds gathered over the outlook for demand and supply amid a surge in Covid-19 cases in Europe and the United States. And they might have further to fall. Reuters’ John Kemp reported on Tuesday that hedge funds had sold enough oil last week to offset the previous week’s purchased that supported prices at around $40 a barrel. But now, the resurgence in Covid-19 is fueling fears of a double-dip recession in two key markets, driving a warier attitude to crude oil.
Rystad Energy, meanwhile, said on Monday that it expected global oil demand to peak in eight years. This was the latest in a string of pessimistic forecasts on oil demand, all of them citing the pandemic as a major factor determining future trends. The forecast is a revision on an earlier one that expected peak oil demand to occur in 2030, with the company citing the rush to a greener energy future as another determining factor.
At the same time, OPEC appears to be divided on the next steps in oil production control. While some members are determined to keep a lid on output to support prices, others are getting impatient to resume production growth. According to a recent Reuters report, citing sources from the cartel and the oil industry, some OPEC members wanted to start producing more oil from January.
“The countries are being suffocated with those cuts, it is very tough to continue with them next year too,” one of these sources told Reuters.
It is telling that some OPEC members would prefer to pump more and sell the oil at weaker prices than keep the curbs and sell at higher prices. It also suggests that the internal division in OPEC could deepen if prices continue down as Covid-19 cases continue up.
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According to Reuters’ Kemp, investors and traders don’t seem concerned about the OEPC+ cuts. There is optimism there. Yet it is not sufficient to motivate more oil buying because of the demand outlook. The demand outlook, for its part, is tied fast to the pandemic outlook, and that one is pretty pessimistic right now.
This week, of course, one more factor would add to oil market volatility, and it is the U.S. presidential election. A Trump win is likely to be bullish for prices in the short term but perhaps not in the long term because of his support for the oil and gas industry that could mean an increase in production down the road.
A Biden win could be the opposite: negative in the immediate term but bullish for oil in the long term as increased regulation, and a partial ban on fracking would tighten supply, as per Goldman Sachs. On the other hand, Biden could seal a deal with Iran, which would mean more Iranian crude coming into the market.
Analysts, meanwhile, expect oil to continue trading within a range until the end of the year, with Brent averaging $42.32 per barrel for full-2020 and rising to a bit above $49 per barrel in 2021. The only thing that could move benchmarks substantially higher would be some good news from the vaccine development front or a production outage in Libya, which has been ramping up production with lightning speed: the country reported output of 800,000 bpd most recently, from below 100,000 bpd in late September.
As Libya continues to boost production, as the effect of the U.S. elections comes and goes, and as demand remains depressed, prices could stay below $40 for longer this time, especially with drilling and fracking rebounding in the United States, adding more pressure to benchmarks. The only hope for prices appears to be vaccine news. Whatever OPEC+ decides to do from January, anything short of even deeper cuts has already probably been factored in traders’ buying and selling decisions.
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By Irina Slav for Oilprice.com
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That is why it is wise for OPEC+ to extend the current production cuts of 7.7 million barrels a day (mbd) beyond January 2021 for three months as Russia is inclined to suggest rather than relaxing the cuts by 2 mbd as was originally planned.
This will enable OPEC+ to judge the market fundamentals by then better. Furthermore, the second wave of the pandemic might recede with the possibility of some anti-COVID vaccines becoming available by then.
This could also be a compromise between those members who want to relax the cuts by 2 mbd and others who want them extended through 2021.
Rystad Energy’s projection that COVID-19 pandemic will accelerate peak oil demand to 2028 should be totally ignored as no more than a flamboyant attention-seeking affair. One should remember its ludicrous projection in 2018 that US oil production by 2025 would be bigger that the combined production of both Russia and Saudi Arabia.
Moreover, neither Biden nor Trump has any influence on the global oil market. The fundamentals are the ones that determine prices and demand.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London