Oil markets have jumped. The demand is increasing. The supply has tightened. Around the same time last month, it was a bloodbath. Now the markets are somewhat dynamic. A complete turnaround, indeed.
Yet the question remains; is it sustainable?
A number of factors have contributed. Countries open up. Traffic on the streets has increased. The lock and restrictions are lifted in a number of countries. People started commuting, but mostly to their place of work. Many continue to avoid public transport and use cars, to avoid contact with others – as much as possible. The fear factor persists.
This “increase” in demand had an impact on crude market prices. But is it really an increase in demand? The savings had to open up, sooner or later. They couldn’t have been closed forever. And once opened, crude oil consumption levels must have increased. Everyone knew it. However, the fact is that global consumption has not returned to pre-pandemic levels. People remain cautious.
In reality, it is not an increase in demand. This catches up with lost demand – and only to a certain extent – while a “new normal” is emerging.
Meanwhile, global crude supplies have declined – and only marginally. The Organization of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia and its non-OPEC partners led by Russia continue to tighten the taps. With extreme political pressure on Saudi Arabia to cut supplies, Riyadh is taking the lion’s share of the cuts. In addition, it has just been announced that production in the Saudi-Kuwaiti neutral zone, shared equally by the two countries, would also be interrupted for a month starting June 1. This would represent between 300,000 and half a million barrels a day. of world production.
Unintentional declines in production by the world’s largest producer, the United States also contributed significantly to the balance. In fact, US oil production is declining much faster and more deeply than analysts initially thought.
The EIA’s estimate of the weekly US crude oil (and condensate) production in the field, for the week ending May 15, 2020, indicates a reduction of 11.5 million barrels per day 1.6 million barrels per day since the production peak estimated at 13.1 million. bpd reported for the week ending March 13, 2020.
According to OIlprice.com, the United States and Canada appear to have lost somewhere between 3.5 and 4.5 million b / d of crude oil and condensate due to oil production shutdowns. In North Dakota, more than 7,000 wells have been closed, shutting down 950,000 b / d of oil and condensate production.
The decline in American production has been so rapid that American producers are now one of the main contributors to the Opec + coalition (to which they are not a party) to reduce global oil supplies, said Julian Lee in a Bloomberg opinion piece.
Yet there is also a flip side to the story. There is only a growing echo, that the increase in prices could revive the shale revolution. Shale has the ability to spoil the party by restarting closed production or completing wells, when prices go up high enough, says Forbes. “There is a double risk on the horizon: just as the too rapid lifting of blockages could lead to a second peak of viral infections and death, the too rapid relaxation of restrictions on oil production risks causing a second collapse of the oil prices, “said Lee.
Some believe that the American shale must evolve slowly to support market trends. The price of oil is now 80% higher than it was in mid-April. The upward sentiment, however, raises another question: will producers be tempted by the rise in crude oil prices to ignore quotas within Opec +? Will the American shale resume its drilling activities sooner than the market needs, asked Tsvetana Paraskova when writing for Oilprice.com. Some might be tempted.
There is also speculation that once the markets stabilize, the price war between the two crude giants, Russia and Saudi Arabia, may start again. “Once the price goes back to $ 50-55, I would not rule out the possibility that the fight for the markets would reignite,” said Tass, quoting Alexander Gryaznov, director of S&P Global Ratings in Russia.
The markets have breathed a sigh of relief for now, but is it sustainable, and if so, for how long is it still under the hammer. Fundamentals continue to be weak and, as Ellen R. Wald says, feelings, hope and headlines fuel the exuberance of the oil market.
Posted in Dawn, May 24, 2020