Agri Business

Crude oil at the crossroads; but Brent to stay above $40

G Chandrashekhar July 14 | Updated on July 14, 2020 Published on July 14, 2020

The global crude oil market is currently torn between bullish and bearish factors – continued discipline in output cuts by OPEC+ on the one hand and on the other hand is the fear of recurrence of the dreaded Covid-19 pandemic on consumption demand.

There are other factors playing out in varying degrees including the risk of escalation in geopolitical tensions between the US and China and a weaker US dollar. China’s record import during June is, of course, seen as a silver lining.

According to data, the Asian major’s crude oil import volume was up by one-third to set a new monthly record of a little over 53 million tons or 12.9 million barrels a day (mbd). Without doubt, import data suggest a smart pick up in China’s economic activity.

At the same time, there is reason to believe, China was on a bargain-hunting spree during April when the oil market hit rock-bottom. There are now questions whether the same level of import would continue in July and beyond as oil prices have shown a smart recovery after the April collapse.

The oil market is now showing incipient signs of weakness as OPEC+ has called for a meeting to consider whether production should be gradually stepped up. The timing of the meeting coincides with renewed concerns over demand. For the market participants, it creates a risk of price correction. Currently, Brent is trading close to $43 a barrel and WTI a tad above $41 a barrel.

In its monthly report published last week, the International Energy Agency (IEA) highlighted the risk to demand following large number of new Covid-19 cases. The IEA also pointed out that destruction of demand during the April-June quarter was less than anticipated. On the other hand, compliance (of output cut decision) by OPEC+ has been remarkable.

Supply deficit anticipated

So, overall oil production decreased by about 14 mbd from its April high to a nine-year low of 86.9 mbd, as per IEA report. Data suggest that the second half of the year will witness supply deficit. OPEC+ is meeting precisely to consider the looming supply deficit and in that light consider reducing the record-high production cuts. Around 2 mbd production may be brought back.

Contrary to expectations, the US shale producers have not returned to the market despite rising prices. Although IEA expects production to recover soon in the US, there is no solid evidence of it happening. The rig count continues to drop and stood last week at 181, marginally above its June 2009 low of 179.

So, the situation is fraught with possibilities. At the current pace of demand, a deficit in the third and fourth quarter of the year appears imminent. An increase in production by 2 mbd would thus come as a big relief. Will the US shale producers be able to surprise the market? It appears unlikely anytime soon.

So, on current reckoning, for the rest of the year, Brent at $40-45 a barrel could be the range.

(The writer is a policy commentator and commodities market specialist. Views are personal)

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on July 14, 2020
This article is closed for comments.
Please Email the Editor