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Summary
- The oil market is again range-bound despite supply ease by OPEC and allies as the market assesses the recent development to be balancing the demand and supply dynamics.
- OPEC and allies have decided to ease the production cut from a record 9.7 million barrels per day to 7.7 million barrels per day from August 2020.
- The first impression of the ease in supply curtailment seems to be on a negative side for the market; however, if one considers all the nitty-gritty carefully, the demand and supply dynamics still look balanced.
- Thus, the market lacks direction and awaits further stimulus.
The much-awaited impetus to the oil market is finally out with OPEC and allies deciding to ease the supply curbs from August 2020 from the record production cut of 9.7 million barrels per day, decided under the Declaration of Cooperation (or Doc), to 7.7 million barrels per day.
- The oil cartel and allies now see the global economy recovering and have mutually agreed to lower the supply cuts, which was previously extended to July 2020.
- Apart from the supply side, the demand counter now seems to be improving across the United States, inferred from large drawdowns of the commercial crude oil inventory and high level of oil imports, witnessed recently.
However, the oil market is yet to fathom a direction as it still remains flat, and oil participants are still assessing the impact of the recent decision of OPEC and allies.
Where Would the Oil Market Head Ahead?
The oil market has been one of the most volatile markets in the recent past over a drastic fall globally and OPEC’s stance in the face of production cuts to support the price. However, with global oil explorers jettisoning their digging tools and countries with large oil reserves curtailing supply, the oil prices had recovered substantially to trade above USD 42 per barrel (Brent crude).
Post reaching the level of USD 42, the oil market has now reached a consolidation with prices hovering near USD 42.0 per barrel and occasionally oscillating in the range of +/- 1 to 2 per cent.
But now many are trying to reckon what impact the OPEC’s decision would have on the oil market, as the recent surge in the oil price has been instigated by the supply curb rather than improvement in the demand.
The answer to the question again lies in the demand and supply dynamics
Supply Dynamics
With the recent decision to ease supply by the oil cartel and its allies from 9.7 million barrels per day to 7.7 million barrels per day, and with these developments, the first speculation would be that the oil market would fall as supply is getting increased.
However, we also need to consider a few untold facts about the supply chain. As we are familiar not all OPEC members, have followed the supply norms under Doc, and OPEC and allies have built a consistent pressure on such members to comply with the DoC, finally prompting many members such as Nigeria to follow the supply cut now.
Even Saudi Arabian Energy Minister- Prince Abdulaziz bin Salman also believes so and mentioned to media that countries which over-produced earlier this year would compensate by making extra August-September cuts, which would eventually lead to an effective production cut of 8.1 to 8.3 million barrels per day.
Demand Dynamics
On the demand counter, while the global oil demand is still significantly below the pre-crisis level, it is anticipated to improve over time, and considering the recent United States oil trade figures, it seems that the falling oil demand is finally taking a breather.
The United States commercial crude oil inventory (excluding strategic petroleum reserve) declined by 7.5 million barrels per day for the week ended 10 July 2020 to reach 531.7 million barrels, averaging about 17 per cent above the five year average for this time of year.
While the commercial crude oil inventory witnessed a large drawdown, the market is anticipating the United States net imports to witness a similar spike ahead as was seen for the week ended 3 July 2020 of 7.39 million barrels per day.
Some Forecasts To Gauge Market Sentiments
- The United States Energy Information Administration anticipates that Brent spot prices would average USD 41 a barrel during the second half of the year while further rising in 2021 to reach USD 50 a barrel.
- Both the near-term and medium-term projection by EIA is USD 4 and USD 2 per barrel higher against its previous forecast in June 2020.
- Furthermore, EIA estimates that the global oil inventories would decline during the second half of 2020 through 2021.
- The global liquid fuels inventories are estimated to have risen at a rate of 6.7 million barrels per day during the first-half while expected to decline at a rate of 3.3 million barrels per day during the second half and then decline by another 1.1 million barrels per day in 2021.
- The United States average domestic crude production is projected to fall in 2020.
- EIA estimates that the U.S. crude oil production will average 11.6 million barrels per day in 2020 and 11.0 million barrels per day in 2021, down by 0.6 and 1.2Mbpd against the average production of 12.2Mbpd in 2019.
To summarise, while the production ease is a negative stimulus for the oil market and being speculative on short-side is presumptuous, market participants need to consider all the nitty-gritty of the oil market, over both the demand and supply dynamics.
Just like above-discussed EIA forecast, many other oil-related forecasts are now pointing towards higher average price over the coming period, both near and medium, and market particpants need to closely monitor other developments on the oil front to reckon the future direction.
However, considerable risk in the oil market still prevails with the emerging second wave of COVID-19 across China, and day-by-day surging cases across many countries could take a toll on the global oil demand.
