When looking at the hazy picture currently painted by news, publications and facts on the ground, the only real conclusion that can be drawn is that the current price hike is not yet based on the fundamentals of market. The increase in current demand, as shown by some analyzes in Asia, is not based on the recovery of consumer or industry demand, but is mainly due to refinery operations which take advantage of relatively low oil prices. . The use of petroleum in storage to produce petroleum products is a normal economic phenomenon, preparing higher margin products for the future while opening up additional storage space for new imports.
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Overall, therefore, optimism should be tempered, as there are as yet no real signs of improvement available in major economic regions, particularly the United States and the EU, which would suggest a evolution towards a pre-coronavirus economy. Oil market analysts and investors seem to forget that current economic figures, which are already extremely poor, are probably just the tip of the iceberg. When looking at the economic situation in the euro area and the EU in general, the positive economic figures are largely the result of government financial support and will worsen when that support is reduced. The current stimulus packages are unsustainable and a high number of bankruptcies and layoffs are expected before the end of the summer.
The economic backbone of the main industries in Europe, the automotive, airline, tourism and even manufacturing industries, is facing dark and very precarious years. Demand for crude oil and products will be hit hard if the expected rise in unemployment becomes reality. The United States and other major markets do not look better. Current US stimulus packages are supporting certain sectors of the economy, while already high unemployment rates will lead to foreclosures, higher credit debts and stranded car loan payments, etc. The demand for crude oil, the world’s second largest consumer market, seems to be heading towards a cliff.
The Asian figures, which are presented by several parties as promising, are still unlikely to meet expectations. China’s production and GDP growth figures were already the subject of much debate before the global pandemic, and now they will suffer from declining trade demand and possible political strife. A combination of trade wars, the EU’s reluctance to keep its doors open to China’s economic power, and a continuing struggle to avert an internal economic crisis, do not bode well for the Asian giant. Demand for Chinese products is falling and will continue to fall if its main customers (the EU and the United States) are hit by an economic recession.
Even within the physical oil market itself, it seems that optimism is out of place. OPEC + production cuts continue, but compliance is below 90 percent, which means major producers continue to hit markets with additional unwanted oil volumes. Saudi Arabia, the United Arab Emirates and Kuwait are living up to their commitments, but Iraq and others are struggling. At the same time, a prolonged production reduction strategy is no longer viable for many producers as their economies are in ruins and troubles are brewing. Non-OPEC producers are also looking for a way out, and Russia has said it sees no long-term options for reduced production. Oil production in the United States, which has been hit by both COVID and an OPEC + oil price war, is currently struggling but has the potential to return online quickly. If oil prices remain in the range of 35 to 40 dollars a barrel, we will see a re-emergence of several shale oil players and additional (unwanted) volumes on the market. In addition, global crude oil storage volumes are still at historically high levels. Last week’s optimistic forecasts for storage volume drawdowns are likely unique. The fact remains that there is still too much oil available, but SPRs are used to improve storage figures.
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Another reason for our overly optimistic outlook is that the profit strategy of downstream companies has led to an increase in the volumes of products stored, as demand for products is low. This can be seen in the US crude stocks which have increased more than expected, which adds to concerns about oversupply. The American Petroleum Institute (API) reported that US crude stocks rose 1.7 million barrels last week, well before analysts’ expectations for 300,000 barrels of construction. While product volumes have shown an appeal for storage, the optimism here is that fuel consumption is accelerating while some economies are loosening locking measures. Looking at the actual numbers, demand for products is still far below normal figures for the same period last year. Another major concern is that China, the world’s largest importer of crude oil, is also expected to slow imports of crude oil in the third quarter, following record purchases in recent months, as rising oil prices have dampened demand and refiners worry about a second virus outbreak.
Looking at the fundamentals, combined with an increase in global economic and geopolitical unrest, there is nothing to justify the optimism of the oil market in 2020. The summer and fall of 2020 will be volatile periods for the oil markets, with a possible economic recession of unknown magnitude. the global economy. Rather, optimism should be pointed towards 2021. A combination of weak upstream investment, combined with potential new unrest in the MENA region (Libya-Iraq) or the suppression of weak upstream parties, will lead to a supply crisis. Under the fog of current demand discussions and false optimism about economic growth in Asia and other regions, a supply crisis is forming and will hit the market hard. The year 2021 will recharge oil and gas at once, as we move from a demand-driven market to a supply-driven one. Prices will rise, even with a global economic crisis, but revenues will be distributed to new energy players who will replace the current U.S.-E.U. upstream oil and gas sector. An average price of crude oil (Brent) above $ 40 a barrel is wishful thinking in 2020. We can see increases, but the general fundamentals show a range of 30 to 34 dollars rather than 40 to 45 dollars.
By Cyril Widdershoven for Oilprice.com
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