S Oil To Remain On Shaky Grounds Due To COVID-19

Oil will continue to remain on shaky grounds this year, thanks to the ongoing COVID-19 pandemic. After trading negatively in April this year, the WTI has recovered well, as it is currently trading at around $40 per barrel. Looking at the current market situation, it is important to analyze the existing supply-demand fundamentals of oil and its impact on prices.

Supply-side

A substantial drop in global oil supplies has supported oil prices in the last couple of months. According to International Energy Agency’s (IEA) oil market report, the global crude oil supply declined by 2.4 million barrels per day in June to a 9 -year low of 86.9 million barrels per day. One of the biggest reasons for this decline was a high- compliance rate of OPEC+ (at 108%) in June. This was OPEC’s lowest output in the last three decades, and this included an additional supply cut of 1 million barrels per day by OPEC’s undisputed leader- Saudi Arabia. Investors must note that global oil supplies can fall further by 7.2 barrels per day in 2020- provided OPEC+ maintains its production cuts in the near future. Even U.S. oil production fell by around 0.5 million barrels per day (Month – on- Month) in June. In fact, U.S based Energy Information Administration (EIA) expects the annual U.S crude oil production in 2020 to decline by 0.6 million barrels per day when compared to 2019. All these factors will support oil prices in the coming time.

Image Source: EIA STEO

Demand Side

The global oil demand has been severely impacted because of the ongoing COVID-19 pandemic. Several countries across the world have imposed lockdowns that have reduced the demand and consumption of crude oil. According to IEA, the global oil demand declined by 16.4 million barrels per day (Year-on-Year) in 2Q20 because of lockdowns.  Although demand rebounded in May thanks to China and India, it must be noted that India’s oil demand may fall again as number of COVID cases continue to rise and there are partial lockdowns planned in several Indian states. Even the U.S is witnessing a steady increase in number of COVID cases. Overall, IEA expects global oil demand to reduce by 7.9 million barrels in 2020. Even the U.S based- EIA is expecting global oil consumption in 2020 to decline by 5.7% when compared to 2019.

Image Source: EIA STEO

However, I firmly believe that global oil demand will pick up in the second half of 2020 when the majority of the countries bounce back from lockdowns.

Conclusion

When I look at the supply side of oil, I see some risks that can put pressure on oil prices. One of them is OPEC+’s compliance levels. Investors must note that OPEC member- Libya will add more oil to market after force majeure on its oil exports got lifted. Besides, if OPEC+ decides to ease its production cuts during its next meeting, then this will have a negative impact on oil prices. On the demand side, I expect it to remain subdued in Asian markets such as India. This can again put pressure on oil prices. However, a subsequent increase in fuel demand from other bigger markets such as the U.S will support oil prices in the coming time.

Although it’s a mix-bag, most market -related factors are currently supporting oil prices. However, COVID-19 has ensured that things will continue to remain uncertain till there is a vaccine in the market. Looking at the current situation, I expect oil (WTI) to remain in the range of $40 - $50 in the near future.

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Adam Reynolds 1 year ago Member's comment

Good article.

Gaurav Agnihotri 1 year ago Author's comment

Thank you.