Complex Made Simple

There is no rally in oil prices this year and maybe ever again

Hurricane season out west is the only thing left for oil prices to twist them back into shape, barely. 

U.S. hurricane season is limiting supply from the Gulf of Mexico, raising WTI crude futures 2.7% to $38.28 a barrel, last week. Brent crude also advanced 2.3% to $40.53 a barrel. 

But stalled demand and lack of Covid-19 vaccine may delay oil price recovery above $50 until 2021, and it’s not a sure thing.

Oil demand may have peaked in 2019, and sliding downhill from there.

Oil price analysis

Oil prices are likely to remain under pressure and a price recovery above $50 per barrel is not expected before the end of the year at the earliest.

Gulf countries will face a challenging few months in balancing their economies, according to an online briefing by Saxo Bank’s Head of Commodity Strategy, Ole Hansen.

Stalled global energy demand affected by Covid-19 travel restrictions, rapidly mounting oil supplies in storage facilities, and Saudi Arabia’s reduction in its oil-exporting price are the key factors likely to keep the price of oil below $50/barrel until 2021.

“Crude oil has been trading in a fairly stable pattern in the low $40s since June, however, we are seeing evidence in data from the physical market that there are risks emerging. Weak refinery margins, caused primarily by the excess of unwanted diesel and jet fuel, are leading to storage facilities rapidly filling up,” said Hansen.

 “In addition, the long-term impact of low oil prices and Covid-19’s negative impact on global tourism and business travel will continue to pose challenges for the UAE and other GCC economies.” 

He added: “OPEC members are eager to see a price recovery because, at $40, oil is roughly half the price that many members, including Saudi Arabia, need for their budgets to stay in the black.”   

Hansen expects the new normal will mean fewer domestic and international business meetings, a higher rate of professionals working from home, an uptake in cycling as a form of transport, a substitution of domestic holidays for foreign trips, and a preference for domestic service and goods.

A bad year for oil could get worse

At one point, this year, oil prices even turned negative for the first time in history. Ok, it can’t worse than that, but a bleak future for oil is emerging.

In a report last Tuesday, the US International Energy Agency (IEA) revised its forecasts for global oil consumption downward, warning that the market outlook is “even more fragile” than expected and that “the path ahead is treacherous.”

Last Monday, OPEC slashed its expectations of oil demand amidst a large oil glut building.

“Structural changes to the global economy are forecast to persist,” it wrote. Travel and tourism “are not expected to achieve pre-COVID-19 levels of activity before the end of 2021.”

For 2020, OPEC predicts total oil demand will be slashed by nearly 10%. It said it expected world oil demand to fall by 9.46 million barrels per day (bpd) this year, more than the 9.06 million bpd decline expected a month ago.

And demand for oil may have peaked last year, according to British Petroleum (BP), which says the global market for crude might never recover from the coronavirus pandemic.

BP lays out three scenarios for energy demand, all of which forecast a decline in demand for oil over the next 30 years.  

BP and Shell are among the European oil and gas giants that have pledged to reshape their businesses to focus more on zero-carbon energy sources. 

Clean energy winning

BP, Chevron, BHP, and ExxonMobil, together with 157 others deemed the world’s worst polluters, were sent a letter on Monday from Climate Action 100+, a group representing investors with more than $47 trillion in assets, calling on them to put in place strategies to achieve net-zero emissions by 2050 or sooner.

The companies are accused of collectively being responsible for up to 80% of global industrial greenhouse gas emissions.  

Compliance with production cuts

The United Arab Emirates (UAE), currently OPEC’s third-largest producer, has reportedly breached its OPEC+ oil production quota by a massive 520,000 barrels per day (bpd) in August, data from the International Energy Agency (IEA) showed last Tuesday.

According to IEA’s Oil Market Report, cited by Bloomberg, the UAE pumped 3.11 million bpd in August, up by 240,000 bpd from July and 520,000 bpd above its ceiling of 2.59 million bpd as per the OPEC+ deal.

That goes contrary to a Reuters report, that said compliance with oil production cuts in August among OPEC+ members was seen at around 101%.