By Irina Slav
When the pandemic pummeled the oil industry in the spring, many called the situation unprecedented. Prices were falling because of oversupply, but demand was failing to react to lower prices because of the pandemic. Then China’s lockdown ended, and the industry breathed a sigh of relief. Things were going to get back on track. But now lockdowns are being implemented once again and a return to ‘normal’ seems as far away as it has ever been. The UK enters a month-long lockdown today. The country is nowhere near as essential for oil demand as China or India, but that is not what is important. What’s important is the fact the UK – and Germany and France before it – needed a second lockdown to handle the coronavirus that wrecked global oil demand in the spring. That’s why the announcement sent oil prices falling and even an 8-million-barrel weekly draw in U.S. crude oil inventories couldn’t bring benchmarks higher.
Reuters’ Kemp noted in his weekly column on oil that sentiment among traders had flipped from optimism to pessimism for the next six months. Earlier, there appeared to be a decent level of confidence that supply will tighten over the period, and this would push prices higher. Now, fear is resurging that consumption could remain lower than supply amid the current wave of infections. And it seems China is unlikely to come to the rescue this time.
Earlier this year, Asia’s largest economy went on an oil-buying spree, taking advantage of historically low prices. Refiners ramped up their run rates as industrial activity returned to life. And then storage space began filling while demand for the products refiners churned out remained weak. After hitting all-time highs in late spring and early summer, China’s oil imports started declining. According to analysts, this quarter, oil imports will be lower than in the third quarter, but traders will be keeping a close eye on developments to see just how weak they will be.
Meanwhile, in the Middle East, OPEC producers are discussing something that just a couple of months ago would have been unthinkable. They are considering deepening their production cuts instead of relaxing them as planned earlier this year or extending the current rate of production curtailments.
It was agreed in April that the current production cuts, a historic 9.7 million barrels per day, would be relaxed to 7.7 million barrels per day from July. Then, as per the original agreement, the cuts were to be further relaxed to 5.7 million bpd from January 2021. Those plans were thrown out the window when prices failed to rebound, and the cartel stuck with the original cuts through July. The moment they started ramping up production, prices fell. Now, some OPEC members want to keep ramping up, and one of them isn’t even asking for permission.
Libya has been exempt from OPEC+ oil production control deals because of its domestic troubles that have seen numerous production outages at its oil fields and export terminals. Those ports were blockaded in January this year, leading to a slump in oil production from over 1 million bpd to less than 100,000 bpd. And then, in September, the blockade ended, and Libya started ramping up. To date, the country is producing 800,000 bpd that is flowing into a market that already has too much oil.
Meanwhile, travel restrictions remain, stumping any potential oil demand recovery. OPEC doesn’t have a lot of options amid budget deficits and austerity measures, so it is not really a surprise that it is talking about returning to the 9.7-million-bpd cuts. Unfortunately, even this might not help prices: traders are already prepared for an extension of the current production level, and they will quickly factor in a return to 9.7 million bpd. Prices may inch up for a while, but to hold higher, they would need some reliable, good news, such as a successful vaccine for Covid-19.
By Irina Slav for Oilprice.com