Oil prices rallied recently after the United States President Donald Trump suggested both the giant oil producers, Saudi Arabia and Russia to pull-up a chair to the negotiation table; however, the cloud of pessimism is yet hovering above crude oil prices with Brent crude oil futures (CFD) falling from its recent intermediary high of USD 36.29 a barrel (intraday high on April 2, 2020) to the present level of USD 32.62 a barrel (as on April 8, 2020, 12:53 PM AEST).
To Know More, Do Read: Crude Responds Intensely to Trump’s Tweet, Downtrend to Linger Ahead?
Brent crude oil near-month expiry is presently able to hold higher levels as compared to the recent low of USD 21.65 (intraday low on March 30, 2020) due to the market speculation over the upcoming meeting between the oil kingpin- Saudi Arabia and Russia on 09 April 2020, but any possible surge in price is very well capped in the wake of no unanimous decision to curb the production, which has led both the nation to initially engage in the oil price war.
To Know More, Do Read: Optimism Over Trump’s Statement Pushes Oil, A Ray of Hope for Oil Bulls?
While speculations over the negotiation are providing a cushion to the oil price, the oil market conditions yet remain the same with too much oil to absorb as against tapered demand amid the COVID-19 outbreak, which has kept most of the global economic expansion activities in check.
The COVID-19 pandemic has caused significant changes in energy fuel supply and demand patterns by shrinking the economic activities across the globe, which apart from increased non-OPEC production, has further led towards a higher supplied market.
The United States is already at the top of its game with an average record production of 13.0 million barrels per day; however, the United States Energy Information Administration further anticipates that the United States would again become a net importer of crude oil and petroleum products in Q3 CY2020, as the domestic production across the nation gradually declines ahead.
Demand-Supply Dynamics and Future Projections
The oil market is well supplied, while the demand remains muted, which in turn, is anticipated by many industry experts to exert pressure on crude; however, the magnitude of a production cut, which is yet to make way to the market, would be one of the most important factor, which would decide the courseof the oil market ahead.
- EIA suggested in its April short-term energy outlook that the Brent crude oil prices would average USD 33 barrels in 2020, down by ~ 48.43 per cent from the 2019 average price of USD 64 per barrel.
- The organisation trimmed the forecast of 2020 average price by USD 10 per barrel against its previous forecast price of USD 43 per barrel for 2020.
EIA also suggested some near-term average price for oil and mentioned that the price would average USD 23 per barrel during the second quarter of the year 2020 before rising to average at USD 30 per barrel during the second half of the year.
Over the medium-term, EIA anticipates the oil price to average at USD 46 a barrel in 2021, which despite being higher than the anticipated average price of USD 33 for 2020, is USD 10 per barrel less against the previous anticipation of USD 56 a barrel for 2021.
EIA forecast Assumptions and Global Liquid Fuels Consumption
EIA has based all its assumptions on three major considerable factors, i.e., lower economic growth, less air travel, and other reductions in demand.
- The lower GDP and oil consumption forecast, which was limited to China, South Korea, Japan, and Italy, in the previous estimation, has been expanded further as government lockdowns net expands to include most of Europe, the United States, India, and other countries, which is anticipated to take a toll on oil demand.
- As of result of the further travel ban and contracted economic activities, EIA anticipates a 5.2 million barrel per day fall in global petroleum and liquid fuels demand in 2020 from an average of 100.7 million barrel per day in 2019. However, the consumption of liquid fuels across the globe is expected to increase thereafter by 6.4 million barrel per day in 2021.
As the consumption declines, the global liquid fuels inventories are projected to surge by an average rate of 3.9 million barrels per day in 2020 after declining by 0.2 million barrels per day in 2019. The organisation further estimates the global liquid fuels inventory to rise at a rate of 5.7 million barrels per day in the first quarter of the year.
Non-OPEC Liquid and Petroleum Supply
- Non-OPEC petroleum and other liquid fuels supply is expected to decline slightly in 2020 as demand flattens and oil price trails lower. The non-OPEC petroleum and other liquid fuels are then projected to increase in 2021 due to the supply growth in Brazil and Canada, which would more than offset a production decline from the United States and other non-OPEC countries.
OPEC Petroleum and Other Liquid Fuel Supply
While the news of re-negotiation between the OPEC and OPEC+ related to the production cut agreement, which was suspended in March 2020, are emerging in the market, the United States Energy Information Administration anticipates that there would be no re-implementation of an OPEC+ agreement over the short-term and OPEC members with surplus production capacity would further increase their production to capture and maintain their market share.
- The oil kingpin- Saudi is estimated to ramp up its crude oil production to near full capacity in the second quarter of 2020 to regain the global market share as competition intensifies across the globe due to a level-field production costdue to a decline in higher-cost production.
- Over the OPEC side, EIA projects the sanction by the United States on Iran and Venezuela would remain in place over the short-term, while Libya continues to face production challenges.
In a nutshell, the global oil inventories are expected to increase over the short-term, which as per the EIA estimation would further lower the average oil price by further USD 10 per barrel in 2020. The non-OPEC petroleum and other liquid fuels supply are expected to decline slightly in 2020 as demand flattens and oil price trails lower, while no re-implementation of the production cut agreement is also anticipated by the United States Energy Information Administration.
While the United States President is pushing both the nation to ink a deal, both oil producers are scheduled to meet on 09 April 2020, which would further decide the faith of the oil market in short- to medium-term.
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