Oil Market Not Out of The Woods Yet- Says OPEC Secretary General HE Mohammad

Summary

• Oil market is currently on a standby mode post the recent meeting held by the OPEC not coming to a concrete conclusion concerning the extension of the production cut deadline from June 2020 until year-end.
• The OPEC Secretary General HE Mohammad made it clear that currently OPEC awaits further data gathering and analysis but had assured OPEC members that it would take all necessary measures to bring stability in the oil market.
• The assurance is currently providing cushion to the Brent crude oil price, which is currently hovering around its previous high in the range of USD 39 to USD 40 per barrel.
• The United States is keeping up its promise to lower the domestic oil production with weekly production plunging to 11.2 million barrels per day.
• Apart from that, the recent drawdown in the crude oil inventory (excluding SPR) had prompted the US to increase crude import, which during the recent week climbed to a 10-month high.

The ongoing rally in crude oil prices is on a halt as the market awaits OPEC announcement on a likely extension in the production cut from June 2020 to the end of the year. Brent crude oil futures, which rose from USD 15.98 per barrel (intraday low on 22 April 2020) to the level of USD 40.53 (intraday high on 3 June 2020) to mark a price recovery of over 150.0 per cent from its recent bottom, is now hovering around USD 39 to USD 40 per barrel (as on 5 June 2020 12:16 PM AEST).

To Know More, Do Read: Supply Curtails Card Boosting Oil Sentiments While Market Awaits NPC Stimulus in China

On 3 June 2020, OPEC held its 133rd Meeting of the Economic Commission Board, which was initially being speculated by the market to lead to a production cut extension; however, while both the Saudi and Russia are pushing for a production curtail, many OPEC+ members are still reluctant, and OPEC would release the final discussion by 7 June 2020.

While addressing the conference, the OPEC Secretary General- HE Mohammad Sanusi Barkindo discussed about the challenges currently being faced by oil-producing countries and the overall oil market along with actions taken by OPEC to bring stability into the fold, the Secretary General also signalled that the OPEC would wait for further data gathering to devise an appropriate response.

HE Mohammad Sanusi Barkindo of concluded the conference with the following statement and suggested that further decision would be communicated to the market.

While the market speculated that the meeting would lead to a likely extension in the production cut deadline, it did not give up hope after the meeting as the OPEC made it clear that it would further gather and analyse data which should assist them in devising the future plans.

Oil market remained stagnant and the price of Brent crude oil futures remained glued in the range of USD 39 to USD 40 per barrel.

The Decline in Global Oil Exploration Expenditure

The global oil exploration is already under a declining trend and OPEC along with many other organisations such as the United States Energy Information Administration believe that the current low oil price environment would further knock down the global exploration expenditure. EIA had recently put out an estimate on crude oil prices and as per the estimate crude oil to trade at USD 34 per barrel in 2020.

To Know More, Do Read: EIA Forecasts Brent Crude Oil Prices to Average USD 34 Per Barrel in 2020

During the conference, the OPEC Secretary General suggested that the cartel now anticipates the CAPEX in non-OPEC countries to drop by 23 per cent on a y-o-y basis during the year to stand close to half of the record expenditure of USD 741 billion, seen in 2014.

Furthermore, the EIA projects that while the global oil exploration and development expenditure rose by 13 per cent in 2019 for 102 listed companies to stand at USD 361 billion, the decline in the crude oil price would bring down global proved reserves along with the exploration and development expenditure.

Oil Production and Consumption Scenario Across the United States

Apart from Russia and Saudi, the United States has also committed to bring stability into the oil market by curtailing domestic production. The domestic oil production in the United States is currently witnessing a downtrend, and last week it further plunged to 11.2 million barrels per day (for the week ended 29 May 2020) from its record average levels of 13.0 million barrels per day seen during the end of the year 2019.

On the demand counter, in the recent past, the demand for OPEC crude across the United States surged post the crude oil inventory across the nation witnessed a drawdown of 5.0 million barrels (for the period ended 20 May 2020).

During the same week (ended 22 May 2020), the overall imports of oil across the United States reached to almost a 10-month high of 7.2 million barrels per day.

However, post a spike in net imports, the following week crude oil inventory across the nation (excluding SPR) witnessed a build of 7.9 million (as on 28 May 2020), which further allowed a little cooling in net imports, which plunged to stand at 6.1 million barrels per day (for the week ended 29 May 2020); however, remained considerably higher against the past few weeks.

Key Takeaways

To conclude, the OPEC and members are still to take a call on any decision related to the extension in the production cut deadline and as they await further data gathering and analysis. However, OPEC Secretary General had provided an assurance to oil-producing countries that the organisation would take all relevant measures to bring stability in the oil market, which in turn, is providing a cushion to the Brent crude oil price which is hovering in the range of USD 39 to USD 40 per barrel.

The oil exploration and development expenditure are estimated by both OPEC and the U.S. EIA to decline ahead.

Furthermore, the United States is decelerating its domestic crude oil output, which has now plunged to a weekly level of 11.2 million barrels per day. Also, the current oil imports are large against its recent past levels.