How is Crude Oil Poised for the Reminder of the year 2020?

Summary

• Crude oil prices are showing a decent recovery in the wake of supply curtailment by OPEC and a moderate pick up in global economic activities.
• The current momentum in oil prices is further supporting the share price of many ASX-listed oil & gas stocks.
• OPEC anticipates the global oil demand to decrease by 9.1 million barrels per day during the year over the negative economic impact of COVID-19 outbreak.
• However, while a fall is estimated for the second half of the year 2020, it would be less as compared to the fall in demand witnessed during the first half, but lower as compared to pre-crisis levels.
• So, if demand would remain low, what factors would determine the fate of the oil market during the second half of the year?

Crude oil prices are showing recovery signs with Brent crude oil futures splashing from USD 15.98 per barrel (intraday low on 22 April 2020) to the present high of USD 43.93 (as on 23 June 2020) to mark a price gain of ~ 174.90 per cent.

The surge in crude oil prices has also improved market sentiments around ASX-listed oil & gas stocks, currently following the oil market lead and showing positive sessions on the exchange.

To Know More, Do Read: What Are Chartists Pointing Out in ASX-listed Oil & Gas Stocks- WPL, OSH, and STO

The oil market across the globe continues to tighten with several production cut and extension of the record cut by OPEC and allies to the tune of 9.7 million barrels per day. OPEC and allies recently chaired a meeting, in which the oil cartel suggested that the organisation would further consider an extension in the production cut beyond July post factoring better compliance from defaulters.

To Know More, Do Read: Oil Market Not Out of The Woods Yet- Says OPEC Secretary General HE Mohammad

In the recent past, several countries that did not adhere to the production cut agreement, such as Nigeria, had come into the limelight post their recent announcement that they would comply better with OPEC’s decision to keep the supply chain thin, which in turn, could address the current oil market supply glut issue.

While the supply chain is being taken care of by OPEC and allies, there is still the danger of demand outages in the wake of a surge in COVID-19 cases across large oil-consuming countries, reflecting that albeit the OPEC and allies have controlled the supply, the demand still remains considerably impaired as compared to the pre-crisis level.

Global Demand Outlook Clogging Oil Rally

The global oil demand scenario could be further zoomed by analysing the recent projection by OPEC in its monthly report (June 2020), suggesting that the global oil demand would decrease by 9.1 million barrels per day during the year over the negative economic impact of COVID-19 outbreak, practically eliminating global oil demand growth potential and leading to a yearly decline of 6.4 million barrels per day in demand during the first quarter of the year and an estimated decline of 17.3 million barrels per day for the second quarter of the year on a yearly basis.

The major decline in the oil demand is presently coming from the largest oil-consuming sector, i.e., transportation, which is further anticipated by industry experts to witness weak oil demand throughout the year 2020 with lockdowns in various countries particularly the US, Europe, India and the Middle East putting pressure on the jet fuel demand.

Furthermore, the decline in manufacturing activities across the globe since the beginning of the year as compared to the last quarter of the year 2019 has also severely impacted the industrial oil demand. However, in the status quo, there has been a slight recovery in manufacturing activities across the globe, especially China; however, the fear of the second wave of infection, that has marked its presence in China and New Zealand is keeping a lid on the overall global demand projections.

To Know More, Do Read: ASX-Listed Oil & Gas Stocks Show Massive Gap Downs; Is the OPEC Effort Going in Vain?

What’s Second-Half Holding For The Oil Market

The dust in the oil market finally seems to be settling down after an unprecedented and turbulent first-half as more and more actual data start trickling in. After witnessing a weak oil demand, the global economies are anticipated to gradually recover with ease in restrictions and lockdown, fuelling the oil demand.

However, while the gradual recovery in the global economy, supported by unprecedented fiscal and monetary stimulus could have a positive impact on the demand, many industry experts anticipate that it will not be able to compensate for the significant decline witnessed in the first half of the year.

So far, the market has reacted positively to the OPEC and its allies decision to extend the production cut beyond its initial deadline of June 2020 to July 2020; however, further positive move in oil would entirely depend upon the level of global economic activities and the decision of OPEC and allies to extend the DoC or the Declaration of Cooperation ahead.

Many sectors such as leisure, travel, are anticipated to remain under pressure as compared to their pre-crisis level, and the OPEC anticipates the global growth to witness a y-o-y decline of 10 per cent.

The OPEC anticipates the global oil demand to take a hit of 6.4 million barrels per day during the second half of the year; however, it remains considerably lower against the fall of 11.9 million barrels per day of oil demand during the first half of the year.

Thus, while the oil demand is anticipated to witness a decline during the second half of the year as well, the future oil outlook depends upon the level of economic activities across various top-oil consuming nations and OPEC’s stance over an extension of the production cut beyond July 2020.

In a nutshell, oil prices have reacted positively to the OPEC stimulus in the face of a supply cut. However, the demand which has been lagging considerably during the first half of the year 2019, is expected to recover slightly during the second half, but not to the pre-crisis level, which in turn, could keep a lid on oil prices and could make oil price movement dependable on OPEC’s decision to extend the period of the current production cut and on better compliance to DoC from previous all the participants.