Do Oil Market Fundamentals Justify $ 40 WTI?


Oil prices have been stuck in the current price range for months now, with price volatility dropping significantly. It seemed that only inventory reports, OPEC’s compliance rate, and the reopening of various European countries such as Spain and Italy could trigger a price change. But the current price cannot be justified if one only refers to the fundamentals. It is clear that the inventory draws that we are seeing are not driven by real demand. China’s buying frenzy seems slow down in September after the country had stocked up on cheap crude during the summer months.


Recent optimism in the markets is an example of the phenomenon described by Andrei Shleifer and Nicola Gennaioli in their book, A Crisis of Beliefs, in which good news is overrepresented while tail risks are largely ignored. Then when those tail risks surface, there is a fit or crash. We may soon see a similar situation unfold in the oil markets. The fact that there is no lasting recovery in demand in the United States, the Eurozone or Asia should be a worrying fact for oil market analysts. A second wave of COVID-19 would only make matters worse, and the threat of an escalation in the China-US trade war is another short-term risk for oil markets to consider.

Estimations Rystad Energy that a new wave of COVID-19 would once again stop the recovery in oil demand. If countries around the world suffer a second round of lockdowns, around 3.7 mb / d of oil demand could be lost. The case of jet fuel is even worse, as international travel is not expected to return to pre-COVID levels anytime soon.

The outcome of OPEC + production cuts will only add market glut, Rystad forecasting the creation of a total surplus of 170 million barrels of oil between August and November. Related: Gold Could Head To $ 5,000

OPEC’s Monthly Oil Market Report states that “the demand for oil is expected to experience significant year-over-year developments; however, it will remain well below pre-COVID-19 levels ”. He adds that the outlook for recovery remains uncertain. All of this is evident when you consider rising global unemployment, falling consumer spending and a wave of bankrupt small and medium businesses. With all of this data, it is important not to confuse improvement or positive feeling with a return to “normal”.

The recovery in world trade is also slowing, as the chart above shows. Meanwhile, emerging market activity is stagnant.

Graph by primary vision network

We recently saw prices drop below $ 40 for the first time since June as the above demand fears began to weigh on oil markets and the summer driving season was disappointing. As these demand factors gain more attention, it should be clear that the current price range cannot be justified by oil market fundamentals.

Slowing global economic activity, restricted mobility and fears of a new trade war are just a few of the key factors that will continue to weigh on oil prices and could cause prices to drop significantly.

By Osama Rizvi for OilUSD

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