- Oil is at the Stake Again
- Oil’s Recovery is in danger
- Will China be able to save the Oil industry again?
- How will OPEC face the second round of lockdowns?
- The second wave of virus hits oil demand
Oil is at the Stake Again
As if the oil needed more turmoil and uncertainty in the year of COVID-19, now when Joe Biden is closer to the White House, it’s under even greater pressure. Why?
Biden is against the shale industry, so his presidency will harm the US crude oil market after America has become the largest oil exporter in the world under the Trump administration.
A Biden win will also open the door to the return of diplomacy in the relations with Iran.
That means the US sanctions on Iran’s oil exports may be eased opening the way for the return of 2 million barrels per day of Iranian crude exports to the market.
All of this would put pressure on oil markets, besides the second wave of lockdowns.
The good thing: it doesn’t matter to traders whether the price moves up or down, the key thing is that it moves.
It just means: there are sell trades ahead!
When the pandemic hit the oil industry in the spring, many described it as unprecedented.
Prices collapsed as supply was left unwanted, as lower prices failed to attract investors’ attention.
Then China’s shutdown ended, the industry breathed a sigh of relief, and things started to get back on track.
But now the lockdowns are back again as a black cloud that blocks all hopes.
A return to “normal” appears more distant than ever.
Oil’s Recovery is in danger
Sentiment among traders turned from optimistic to pessimistic over their outlook for the next six months.
There was some confidence lately that oil demand would increase slightly, which would push prices higher.
But now, there are renewed concerns that consumption may remain below supply amid the second wave of Coronavirus infections.
The United Kingdom, Italy, France, and Germany were forced to a second lockdown to control the surge of Covid-19 cases, leading to the fall of oil prices sharply.
Travel restrictions are still in place, holding any potential recovery in fuel demand back.
OPEC also doesn’t have many options to support the market, as even the historic cut of 9.7 million barrels per day may not boost prices.
Prices could rise a little for some time, but to maintain it, the oil market needs some good and reliable news, such as a successful vaccine for Coronavirus.
The return of lockdowns threatens the fabric of the oil industry, as some oil and gas companies couldn’t survive the last round of strict measures and low demand.
Walking the same way again, more companies will likely meet this agonizing fate.
Will China be able to save the Oil industry again?
Unfortunately, China won’t come to the rescue this time because it has enough oil.
In early 2020, the Chinese dragon went on an oil-buying spree, taking advantage of historically low prices.
Refineries increased their operating rates with the return of industrial activity.
Then the storage space began to fill up, while the demand for products manufactured in refineries remained weak.
After recording all-time highs in late spring and early summer, China’s import of oil began to decline.
In this fourth quarter of 2020, oil imports are expected to be lower than in the third quarter.
With the increasing number of daily cases of COVID-19 and the return of lockdowns in different parts of the world, OPEC faces one of its biggest challenges so far: the need to cut production more.
The second round of shutdowns might show an indication that future oil demand would decline as expected.
So, OPEC should discuss the possibility of increasing production cuts or extending the current rate of cuts rather than easing them.
The fate of OPEN depends on the strength of oil demand because all plans are based on it: budgets, production plans, and austerity measure OPEC’s original plan are to reduce the current rate of cuts from next January.
For now, this plan is still in place.
However, there are talks that it may cancel it in favor of extending the cuts beyond January 2021.
How will OPEC face the second round of lockdowns?
OPEC+ has agreed in April to relax historic production cuts, from 9.7 million barrels per day to 7.7 million barrels per day, as of July.
The cuts were to be eased further to 5.7 million barrels per day in January 2021.
But these plans went with the winds when prices failed to recover.
The cartel stuck with the original cuts through July.
The moment they started increasing production, oil prices fell sharply.
The OPEC dilemma is that most of its members depend heavily on oil revenues entirely for their country’s budgets.
There are already rumors of members unhappy with the idea of expanding the production cuts.
Among the angry nations that slashed production as a duty are Nigeria and Iraq.
On the other hand, OPEC and Russia – or more likely, Saudi Arabia and Russia – seem to support an extension of the cut.
The Energy Information Administration (EIA) predicted that the pandemic and the fall in oil prices would reduce net oil export revenues for OPEC members to its lowest level in 18 years at $323 billion, compared to $595 billion in 2019.
If Saudi Arabia can bear this loss, the weaker countries may face some struggles, especially if they are dependent on oil revenues, so we won’t find them eager to extend the production cut.
However, if Saudi Arabia and Russia decide to extend the cuts beyond January, the rest of OPEC + members are likely to follow them, regardless of their pain.
The second wave of virus hits oil demand
It seems that the oil industry is heading for a harsh winter, with the attack of the second wave of the Coronavirus and the return of the European lockdown after hitting new records in daily cases.
The United States also broke a record of 110,000 cases per day, and the number of daily infections around the world exceeded half a million cases for the first time since the beginning of the pandemic.
Oil prices collapsed by more than 6% due to this negative news, along with the temporary halt of crude oil orders in China.
Global oil traders – Vitol and Trafigura – expect the second lockdown wave to hurt demand for fuel and oil.
Trafigura expects the second wave to destroy oil demand by about 1 million barrels per day in the US and 1.5 million barrels per day in Europe.
While Vitol’s forecast is more optimistic, it predicts that the recent European shutdowns would definitely affect demand, but perhaps by only half a million barrels per day.
Trafigura expects global oil demand to decline to around 92 million barrels per day or less in the short term, while Vitol expects winter oil demand to reach 96 million barrels per day.
In the end, the new lockdowns could push oil demand to lower levels that create more oversupply – and a headache for OPEC.
Will the OPEC members be able to suffer another blow from low prices and production cut? What is the fate of the US shale oil under the new administration led by Joe Biden? The answer is, it’s complicated as this year is full of extraordinary surprises.