Oil trading has been on the decline these past couple of weeks as conflicting data pulls prices in different directions. But, according to some, a correction may be on the way.
Reuters' John Kemp noted in his weekly column on fund trading that market movers were relatively indifferent to oil futures last week, all thanks to mixed signals from the industry and the media about where oil fundamentals were going. They were a little bit more interested in oil products than crude oil futures, but that was as far as activity went.
In a way, this speaks of subdued price volatility, probably to the chagrin of some traders, at least. But when you have, on the one hand, the IEA and OPEC saying oil demand will remain 8.1-9.1 million bpd lower this year than the last, and, on the other, high-frequency data suggesting this demand is picking up in some key markets, it is easy to see where thick subdued volatility comes from.
Yet from another perspective, traders may be lying in wait for a correction. This is what Capital.com's Nathan Batchelor suggested in an analysis earlier this week. Citing technical analysis, he suggested that oil may be set for a major correction this week before the next price rally begins.
If the rally fails to materialize, which is always a possibility, then prices are going to slump again as disappointed traders sell off. Oil was already down early on Tuesday after it started the week with gains, mostly on the back of reports that China was preparing to ramp up its crude oil imports from the United States as per the trade that deal the two sealed last year.
On the flip side, the Energy Information Administration said in its latest Drilling Productivity Report that drillers were adding wells in the Permian and the Bakken. While not unexpected, any news about a rebound in U.S. shale oil drilling tends to apply downward pressure on prices amid pessimistic forecasts for oil demand, and despite projections that supply will soon shrink sufficiently to boost prices. The latest to come out with such a projection was Bank of America, which said it expected Brent crude to reach $60 a barrel in the first half of next year thanks to a tightening global oil market.
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"Back in June, we upped our oil price forecasts by $5 per barrel (/bbl) and argued that Brent would average $43/bbl in 2020 and $50/bbl in 2021," Bank of America's analysts said. But now they are seeing a deficit on oil markets in the second half of the year, to the tune of 4.9 million bpd, easing to 1.7 million bpd in 2021.
Some may argue that it is way too early to talk about deficits, especially since some OPEC members, notably Saudi Arabia, ramped up their production as early as July. But if demand picks up more strongly, the oversupply, at least, could shrink to levels that would support higher prices.
For now, all eyes are on OPEC+. The group is meeting on Wednesday to discuss the progress of its production-control agreement. Although no changes in this agreement are expected, traders will be watching to get a whiff of the general sentiment in the cartel, which is from this month easing production cuts from 9.7 million bpd to 7.7 million bpd, to remain in effect until the end of the year.
The OPEC+ is unlikely to cause the correction in oil prices that some are anticipating but a surprise inventory build from the EIA, which also reports on Wednesday, could do that. The EIA has been reporting hefty inventory draws for the last three weeks, with the total exceeding 20 million barrels.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. More
Comments
And while concerns about the increasing number of COVID-19 cases in major economies like the United States, India and Brazil are exerting a bearish influence on global oil demand and prices, this bearish influence is more than offset by stronger bullish factors.
The first is a fast depletion of the glut in the global oil market leading to a projected oil market deficit of 4.9 million barrels a day (mbd) in the second half of this year.
The second factor is that China’s rebound is continuing to gain momentum with its roaring crude oil imports breaking all previous records and averaging almost 11.0 mbd during the first half of 2020 or 10% higher than the same period in 2019.
And the third factor is the steep decline in US oil output estimated so far this year at 6.4 mbd and being accelerated by the steep decline in oil rigs from 770 rigs a year ago to 172 now. As a result, US production will be struggling to even reach 6-7 mbd this year and the following years.
Based on the above, I am projecting that global oil demand in the fourth quarter of 2020 will hit 96 mbd, just 5 mbd less than 2019 level of 101.0 mbd compared with OPEC’s 9.1 mbd and IEA’s 8.1 mbd.
If there a price correction then oil prices could be projected to surge to $50-$60 before the end of 2020 instead in the early 2021. By 2022/23 prices could surge beyond $100 as a result of a supply deficit estimated at 10 mbd triggered by a huge decline in global investments in 2020.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London