Choppy waters for crude oil

Updated 16 Aug 2020

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The world’s biggest oil-producing and oil-exporting company Saudi Aramco is optimistic about the pace of oil demand recovery in Asia. — AFP/File
The world’s biggest oil-producing and oil-exporting company Saudi Aramco is optimistic about the pace of oil demand recovery in Asia. — AFP/File

Oil markets are passing through an interesting phase, flashing bullish sentiments and bearish trends simultaneously.

Despite all the ‘crude’ gloom in recent days, some good news also seems to be pouring in from various quarters.

Retrenchment and the lack of capital investment which the industry has seen over the past five-years could lead to shortages of crude eventually, argued David Messler in a piece written for Oilprice.com last June. The shortage could result in firming up of the market prices.

Already, the United States is experiencing a continued decline in output. For the week ending August 14, the US oil and gas rig count, an early indicator of future output, fell by three to an all-time low of 244, Baker Hughes reported. That was 691 rigs, or 74 per cent, below this time last year.

Years of political strife are carrying an impact on Libyan crude output. The ongoing port blockade in Libya is set to keep its oil off the markets, until at least the fourth quarter of 2020, Rystad Energy reported.

Currently, oil production in Libya is around 100,000 barrel per day (bpd), dramatically down from 1.2 million bpd at the start of the year. Dwindling Venezuelan production is also impacting the global crude equation. Its rig count is now literally zero. By June end, Venezuelan output was down to 375,000 bpd — bound to plummet further.

Consequent to all this, the crude tide seemed to change, slightly. The world’s biggest oil-producing and oil-exporting company Saudi Aramco is optimistic about the pace of oil demand recovery in Asia, its chief executive Amin Nasser said last week. “We are seeing a partial recovery in the energy market as countries around the world take steps to ease restrictions and reboot their economies,” Nasser said in a statement following the release of Aramco’s Q2 report.

Demand for crude oil in Asia has almost returned to the levels from before the pandemic, Bloomberg quoted Nasser as saying.

In the meantime, the laggards in the Opec+ (Organisation of the Petroleum Exporting Countries and its allies), from Iraq to Russia, have been reiterating in recent weeks that they would fulfill their output cut commitments. This was music to crude ears.

Messler also points out that currently there is no war premium on crude. That could change. In the wake of reports of Iran seizing an oil tanker passing through the Straits of Hormuz, things may heat up in the region that remains crucially important to the flow of oil.

Supported by all these bullish factors, Brent spot prices rose above $46 for the first time since April on a much weaker US dollar, with the dollar index plunging below 94, a level not seen since June 2018. Last week, US refining runs also rose by 42,000 bpd to stand at 14.637m bpd.

Yet, at the same, oil markets are faced with bearish pressures too. While prices were really on their bottom during March and April, China was on a crude buying spree. That may cool down now. Further, as per some reports, some 120m barrels of crude were awaiting at Chinese ports, ready to be offloaded. That would also adversely impact Chinese crude purchases.

The issue of Iranian crude exports continues to confound the markets. By switching off transponders, Iran has succeeded in exporting as much as 600,000 bpd and not 227,000 bpd, as was estimated in a US Congressional report, NBC’s Raf Sanchez recently said on Twitter.

Reports of China-Iran strategic deal, which includes Chinese buying large volumes of Iranian crude on a regular basis may also dampen the spirits of the markets, some assert.

The International Energy Agency expects crude oil demand this year to be 8.1m bpd lower than it was in 2019, revising its earlier forecast downward by 140,000 bpd. Global crude supply, meanwhile, is on the rise, adding 2.5m bpd in July after Saudi Arabia reversed its voluntary additional 1m bpd cuts and the UAE failed to stick to its Opec+ production quota.

The Opec is also now estimating the demand loss for the year at 9.1m bpd, projecting the global economy to shrink by 4.0 per cent this year, more than the 3.7pc economic drop forecasted in their July report.

Despite blips in recent days, oil majors also seem to be battling for survival. The recent BP announcement to slash oil production by 40pc and pour billions into greens was indicating, the time had come for the BP to wind down its core business, Tom Steyer and Bill McKibben asserted in a joint piece.

All this is no good news for an industry that is already in turmoil.

Published in Dawn, August 16th, 2020