After record production cuts in April intended to prop up the market amid a demand crisis caused by the coronavirus pandemic, the world’s largest oil producers are <a rel="noreferrer noopener" href="https://www.nytimes.com/2020/07/12/business/economy/opec-russia-oil-production-coronavirus.html" target="_blank">expected</a> to ease up on the restrictions and begin to increase their output next month.



KEY FACTS



<ul class="wp-block-list"><li>Saudi Arabia, Russia, and the other members of OPEC+ will meet Wednesday to discuss the current market situation and debate future production limits, the Wall Street Journal <a rel="noreferrer noopener" href="https://www.wsj.com/articles/opec-allies-set-to-ease-oil-cuts-seeing-pandemic-recovery-11594510347" target="_blank">reported</a> over the weekend, adding that most delegates in the organization support loosening restrictions.</li></ul>



<ul class="wp-block-list"><li>As lockdown measures ease across the globe, demand for oil is slowly beginning to rise again as shipping and air travel resume. </li></ul>



<ul class="wp-block-list"><li>Oil prices are still down significantly from pre-pandemic levels, however, with the Brent international benchmark priced at about 30% of January levels. </li></ul>



<ul class="wp-block-list"><li>The International Energy Agency said Friday that while global demand for oil had recovered strongly in China and India in May, world demand is still projected to decline during the second half of the year before recovering in 2021. </li></ul>



<ul class="wp-block-list"><li>The recent spike coronavirus cases and new lockdowns are creating “more uncertainty”: additional lockdowns could discourage travel and international trade, which would put more downward pressure on prices.</li></ul>



<ul class="wp-block-list"><li>The risk to the oil market is “almost certainly to the downside,” the IAE said. </li></ul>



KEY BACKGROUND



In April, the members of the Organization of Petroleum Exporting Countries (OPEC) and its allies&nbsp;<a href="https://www.forbes.com/sites/sarahhansen/2020/04/09/saudi-arabia-and-russia-agree-to-historic-oil-production-cuts-but-they-may-not-be-enough-to-rescue-the-market/#63cf1d8c641a">agreed to record oil production cuts</a>&nbsp;of 9.7 million barrels a day as the coronavirus decimated global demand for crude oil. The agreement put an end to a weeks-long price war between Russia and Saudi Arabia that added even more pressure to an already-struggling market.&nbsp;



CRUCIAL QUOTE



“If OPEC clings to restraining production to keep up prices, I think it’s suicidal,” a person familiar with Saudi Arabia’s thinking told the Journal. “There’s going to be a scramble for market share, and the trick is how the low cost producers assert themselves without crashing the oil price.”



 &#8211; <a href="https://www.forbes.com/sites/sarahhansen/">Sarah Hansen</a>, Forbes Staff, <a href="https://www.forbes.com/markets">Markets</a>

Preis für Rohöl an der Börse

OPEC And Its Allies Are Ready To Boost Production, But Here’s Why An Oil Market Recovery Isn’t Guaranteed

TOPLINE: After months of sagging demand and wild swings in prices that at one point fell below zero, oil has now seen five straight days of gains as economies slowly reopen and traders bet on a comeback.



<h4 class="wp-block-heading">KEY FACTS</h4>



U.S. oil prices jumped nearly 20% on Tuesday, with the June futures contract for West Texas Intermediate crude reaching $24.56 on its fifth straight day of gains.&nbsp;



Last month, futures prices for the May WTI contract&nbsp;<a href="https://www.forbes.com/sites/sarahhansen/2020/04/21/heres-what-negative-oil-prices-really-mean/#4c6a349d5a85">plunged into the negative</a>&nbsp;for the first time in history as demand cratered and storage space filled up.&nbsp;



Brent crude, the international benchmark, saw a bump of almost 14% on Tuesday and settled at $30.97 per barrel.&nbsp;



Prices are responding to a slow uptick in demand: As some states and cities take cautious steps towards reopening, and as Europe and China return to work, investors are optimistic that restrictions on travel and movement will continue to ease.&nbsp;



At the same time, global oil production is dropping thanks to a deal between OPEC and its allies last month to reduce collective output by some 10 million barrels per day.



Some American producers have also taken steps to slow down production; last month, ConocoPhillips said it would cut&nbsp;<a href="http://www.conocophillips.com/news-media/story/conocophillips-to-voluntarily-curtail-225-000-gross-barrels-of-oil-per-day-reduces-2020-cash-uses-by-additional-3-billion-for-total-reduction-of-over-5-billion/" target="_blank" rel="noreferrer noopener">225,000 barrels per day</a>.&nbsp;



<h4 class="wp-block-heading">CRUCIAL QUOTE</h4>



“The reopening of economies has injected a degree of cautious optimism back into an oil market that plunged to historic lows only weeks ago,” RBC analyst Michael Tran&nbsp;<a href="https://www.cnbc.com/2020/05/05/oil-jumps-13percent-in-fifth-day-of-gains-on-demand-recovery-and-production-cuts.html" target="_blank" rel="noreferrer noopener">said</a>&nbsp;in a client note.



<h4 class="wp-block-heading">BIG NUMBERS</h4>



Last week, ExxonMobil&nbsp;<a href="https://www.forbes.com/companies/exxon-mobil" target="_blank" rel="noreferrer noopener">XOM</a>&nbsp;reported its&nbsp;<a href="https://markets.businessinsider.com/news/stocks/exxonmobil-q1-earnings-first-loss-decades-oil-market-price-plunge-2020-5-1029155170" target="_blank" rel="noreferrer noopener">first quarterly earnings loss</a>&nbsp;since 1988 and cut its spending by $10 billion. Two weeks ago, BP saw its&nbsp;<a href="https://www.cnbc.com/2020/04/28/bp-earnings.html" target="_blank" rel="noreferrer noopener">quarterly profit fall 67%</a>&nbsp;compared to the same period last year.&nbsp;



<h4 class="wp-block-heading">TANGENT</h4>



International oil hasn’t been hit nearly as hard as its American counterpart by the coronavirus crisis. The reason for the difference boils down to storage: Brent crude is priced in the middle of the North Sea, where tanker storage is ample and accessible, while WTI oil storage in the U.S. is limited and hard to reach. As a result, Brent is more removed from the coronavirus demand shock while WTI prices are much more sensitive to it.



<h4 class="wp-block-heading">WHAT TO WATCH FOR</h4>



Despite the major production cuts, the oil market is still under pressure and the next few weeks are likely to reveal more weakness. “The existing problems did not magically get resolved, the storage constraint is still there, but a couple of weeks away, so we will see its effect on prices soon, as the market will get tight,” <a rel="noreferrer noopener" href="https://www.barrons.com/articles/home-price-growth-could-slow-to-a-crawl-51588630813" target="_blank">writes</a> Per Magnus Nysveen, head of analysis at Rystad Energy. 



&#8211;<a href="https://www.forbes.com/sites/sarahhansen/">Sarah Hansen</a>, Forbes Staff, <a href="https://www.forbes.com/markets">Markets</a>

The Index of Oil. Up.

Why Are Oil Prices Rebounding?

Recovery in oil prices will depend on recovery in the global economy, says Annabel Bishop, Chief Economist at Investec in Johannesburg.



The recent collapse in the WTI (West Texas Intermediate) oil price has added to negative market sentiment, in an environment where risk aversion was already at high levels. Worsening forecasts of the economic impact of Covid-19 has been a key driver of the elevation in risk aversion in global financial markets, with the global recession expected to be deep and lengthy.



The crisis is unprecedented, and there is no certainty of its length and duration, or the impact it will have. Uncertainty heightens risk aversion in financial markets and the deep recessions forecast around the globe exacerbates risk-off sentiment. Risk aversion in financial markets would indeed be exacerbated further if economic growth forecasts for advanced economies weaken substantially further, and/or if uncertainty around Covid-19 intensifies instead of waning.



While this is not expected, should the path of the pandemic change, the discovery of vaccines and treatment/s be seen to be substantially delayed, the extent of disruptions to supply chains and production substantially greater than anticipated and/or policy responses viewed as insufficient, risk-off in global financial markets could escalate substantially further.



The severe negative impact on health in the United States, as fatalities and infections rise, has likely also been extremely negative for financial markets’ sentiment, with the world’s largest economy expected to see a deep recession this year (-5.9% y/y IMF), and with the negative impacts leaching into next year as well.



Financial markets are still at weak levels, and are likely to remain volatile and weak in the near term until evidence for the beginnings of a recovery in the global economy become clearer.



The collapse in the WTI oil price has come as chronic oversupply of oil has occurred. Storage facilities are close to capacity, inventories are very high, and demand is extremely weak. While WTI was negative yesterday morning at -$4.4/bbl, with pricing on May futures, (with suppliers essentially paying to have deliveries taken off their hands), the Brent crude oil price was at $23.8/bbl. It was expected that soon the WTI pricing would revert to June futures and as a result, the WTI price move back towards that of Brent – this has been in the process of beginning to occur this afternoon as US markets have opened. However, the Brent crude oil price has weakened with its pricing also determined by future contracts. Storage facilities are near full capacity, and demand is exceptionally weak, and production capacity has not been reduced instantly as this is not possible.



WTI and Brent are one of the two main benchmarks for oil prices worldwide, Brent is North Sea crude oil essentially, WTI Texas crude oil, both are light sweet crude oils. The quoted prices are influenced by the futures prices, as noted above, which have collapsed and oil prices in the immediate term are likely to be suppressed. While there are a number of other issues besetting the pricing WTI as well, the prices are not expected to lift until substantial supply cuts occur and demand increases notably. While oil importers will gain, and oil exporters lose substantial revenues, the recovery in oil prices will depend on the recovery in the global economy.



The IMF highlights that “(a) partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound. Much worse growth outcomes are possible and maybe even likely. This would follow if the pandemic and containment measures last longer”. This signals a suppressed view for oil prices for some time.

Tag: Oil and Gas

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OPEC And Its Allies Are Ready To Boost Production, But Here’s Why An Oil Market Recovery Isn’t Guaranteed

Why Are Oil Prices Rebounding?

Oil’s Not Well: ‘Global Recession Expected To Be Deep And Lengthy’