Covid and the new crude normal

Updated 13 Sep 2020

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Fitch reduced its oil price outlook for 2022, expecting Brent Crude prices at $50 per barrel, down from an earlier projection of $53 a barrel. — Reuters/File
Fitch reduced its oil price outlook for 2022, expecting Brent Crude prices at $50 per barrel, down from an earlier projection of $53 a barrel. — Reuters/File

Uncertainty continues to rule. The US Energy Information Administration (EIA) has cut its 2021 demand growth outlook for 2021 to 6.5 million barrels per day (bpd) – 500,000 bpd lower than projected last month. The EIA now expects the Chinese demand to grow only by 1m bpd next year, and not 1.5m bpd as was projected in August.

As per the EIA September Oil Market Report, August also marked the first time during the recovery period that global supply growth surpassed demand growth. Although crude demand grew by 1m bpd in August as compared to July, as per Meghan Gordon of S&P Platts, this was the slowest month-on-month consumption growth since May, when demand began recovering from coronavirus lockdowns.

TASS is now reporting that Russia’s central bank, in its worst-case scenario on the possible risks to its monetary policy over the next three years, has warned that crude oil prices may slump to $25/barrel. However, in its base-case scenario, the Russian central bank projects prices recovering to about $50 a barrel by the end of 2022. Yet, the bank appeared doubtful if things would (ever) return to pre-pandemic normalcy.

In the latest sign of growing uncertainty in the crude markets, Saudi Arabia opted to cut its official selling prices for October. This was despite the output constraints undertaken by the Organisation of the Petroleum Exporting Countries and their allies including Russia and considerable recovery from the bleak global crude consumption pattern of May.

To Irina Slav of Oilprice.com, this move was hardly expected given the Kingdom’s upbeat stance on oil demand. Separately, reports of rising oil and fuel inventories in floating storage are also putting additional pressure on the markets. This was particularly worrisome because it meant that onshore storage space was still full, despite an increase in fuel demand after most lockdowns were eased in May.

In further bad news, Chinese oil imports continued to fall in August after falling in July from a record-high in June, Bloomberg reported.

With Covid-19 rising in many large oil markets, including India and the United States, uncertainty about crude fundamentals remain unusually high. On Thursday, the EIA revealed a climb in crude inventories on the heels of six consecutive weeks of declines raising the possibility of an oversupplied market.

In the meantime, Fitch Ratings has lowered its long-term price assumption for West Texas Intermediate to $50 from $52 a barrel as was projected earlier, reflecting fragile market balances, inventory overhangs, lower break evens, and the energy transition going forward. Brent Crude prices are now expected at $53 a barrel in the long term in the base-case scenario, compared to a previous forecast of $55 per barrel.

Fitch also reduced its oil price outlook for 2022, expecting Brent Crude prices at $50 per barrel, down from an earlier projection of $53 a barrel. As per Fitch, WTI Crude prices are also expected to be lower in 2022 to $47 a barrel, down from $50/barrel as was projected earlier.

Morgan Stanley analysts are now also of the view that the short-term oil market fundamentals look “soft”. Providing an explanation, Morgan Stanley termed, “weaker-than-expected demand” as the cause of this softness in the markets.

The Paris-based International Energy Agency is also joining the chorus, underlining the oil demand recovery has stalled. In its August Oil Market Report, the IEA downgraded its oil demand forecast for this year by 140,000 bpd compared to its estimate the previous month. The Organisation of the Petroleum Exporting Countries (Opec) has also revised down its oil demand forecast in August, pointing to still struggling fuel demand and continued high uncertainty about the pandemic’s impact on economies and mobility.

Consequent to all this, markets were seen wobbling over the last few days. Last Tuesday, prices tumbled to their lowest since June amid growing demand concerns as Covid-19 continued to spread. And oil resumed its trek downward after US government data released on Thursday showed growing domestic crude supplies and wavering gasoline demand. Futures in New York fell toward $37 a barrel after the buildup in crude inventory.

So far, September has not been good to oil markets. The US benchmark futures have fallen about 13 per cent since the end of August. And the outlook continues to look grim, with S&P Global Platts forecasting oil demand to decline by more than 8m barrels a day this year, unlikely to get back to 2019 levels before 2022. This is the ‘new’ normal.

Published in Dawn, September 13th, 2020