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Summary
- Brent at US$42.81 a bbl, WTI at US$40.21 per bbl
- Strong demand recovery from India & China in June, US refined product demand growth awaited
- Libya internal disputes on oil revenue allocation continue, may experience a further disruption in production, NOC blames UAE
Crude oil prices continue their recovery journey on the backs of the increased demand forecast by the International Energy Agency (IEA) for the year 2020. Crude oil in the past 3 months has shown signs of revival after 20 April massacre, recovering multi-fold to trade at US$40.21 a barrel for the US WTI benchmark crude oil 1-month futures contracts on 13 July 2020 at 11:04 am.
US crude oil benchmark WTI 1-month futures source: Eikon EODHD/Others
IEA increases demand projections, Oil gets support from rising demand and reduced supply
Most of the extensive lockdown measures have already been relaxed, leading to a surge in demand in countries including China and India by 0.7 and 1.1 mbpd respectively. With most of the economies still battling the outbreak of the pandemic, an immediate “V-shaped” sharp recovery cannot be assumed.
The global oil demand for April to June 2020 fell by 16.4 million barrels per day. However, for the year 2020, it is expected to average at 7.9 million barrels per day. As for the supply side, the global oil supply fell by 2.4 mbpd in June to average at 86.9 mbpd, a 9-year low levels. Strong agreement and compliance with the supply cut, substantially reduced the oil abundancy in the market. The IEA July report anticipates a recovery of 5.3 mbpd in 2021.
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The average Brent crude oil benchmark prices improved to US$40 a barrel in June, registering an increase of US$11 a barrel against May and US$22 a barrel against the black April month.
Ships Turned into Floating Storage, Freight charges Surged
As soon as the global economies announced lockdown measures, many of the existing oil tankers were stuck in the sea waiting for these economies under quarantine to take the deliveries. Such situations disrupted the shipping industry heavily turning many oil vessels as floating storages amid lower crude oil prices. While only limited freighter was available, the shipping freight charges surged heavily with customers paying as much as double a day for the oil vessel to store or transport oil. While the final prices for importing countries increased due to higher freight charges but still it could not be ignored that they benefited from the lower oil prices.
China bought record amounts of crude oil vessels and converted them into floating storages in the months of April, which are yet to consumed and are facing immense shipping bills leading to a humongous effect on the shipping industry. This crude oil from the oil vessels may further take a bite out of the net domestic demand in China, which has been recovering.
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US Oil Rigs in Operation count continues to Decline
The US energy firms kept cutting down the oil rigs operations domestically, with it yet to register substantial gains in demands especially in refined products including diesel and gasoline. The US operational oil rig count decreased to a mere 258 registering a decrease of 700 in the past 12 months.
Source: Baker Hughes
Conditions set by Libyan forces for lifting oil blockade
Libya is divided into faction forces and has been facing militarised unrest within the country. The forces loyal to the Libyan commander has expressed that the oil production will resume only upon a fair agreement to distribute the revenues among the rival groups.
Earlier in January 2020, the powerful tribes had shut export terminal, blocking the oil pipelines to disrupt the oil trade. The Khalifa Hifter backed factions demand that the oil revenues must be deposited in whole in a foreign bank account and then distributed among various sections to ensure fair distribution.
The Hifter forces are understood to be backed by foreign forces, including the United Arab Emirates, Russia, Egypt, and France. The group has been asking that the oil money should not be shared with the terrorist and mercenaries, which still plague the country.
The UN-supported government is often suspected of working with mercenaries, especially from Syria with the backing from local military groups backed by Turkey, Qatar, and Italy.
Libya is an oil economy with Africa’s largest reserves, and multiple forces fighting with suspected support from foreign lands to gain control of the same. With the disruption of oil export, the Libyan oil companies and the economy stands in a fragile stage.
The Libyan National oil company had been accusing the foreign forces of meddling in the country’s oil exports which just resumed recently. The disrupted oil supply may be interrupted once again with suspected involvement of foreign players to weaken the economy further and gain control over the nation’s vast reserves through local militias or backed fronts.
The Oil futures have shown robust growth, but a long way remains to be covered to traverse their recovery to pre-COVID levels.
