Oil markets can expect more pain to come in the weeks and months ahead as they face an uphill battle back to ‘normal’
By SHAZNI ONG / Pic TMR
THE move to cut production levels appears to have provided crude oil prices with some support to hold on to the gains made in recent days despite the uncertainty of a sustainable rebound in demand as economies across the world move to restart from lockdowns imposed to contain the Covid-19 pandemic.
Although inventory gains have slowed, analysts say any increase in production levels could put pressure on a narrowing cushion of spare storage capacity.
“The US production has declined astronomically and much quicker than any other time during the shale boom years. US President Donald Trump appears to have swayed as unexpected deepening of production cuts in Saudi Arabia, Kuwait, and UAE for June.
“The oil market is rebalancing at a much quicker pace than expected,” AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes said yesterday.
The Brent crude oil futures contract traded at US$29.90 (RM129.47) a barrel (at press time) while the West Texas Intermediate futures contract was priced at US$25.80 a barrel.
Innes added that the global glut has eased due to North American shut-ins and turndowns, and Sau- di’s “whatever it takes” stand which have together quite possibly saved crude oil prices plunging to the depths of despair after the road to recovery hit a massive pothole when National Institute of Allergy and Infectious Diseases director Dr Anthony Fauci dialed down the slope of the market recovery after suggesting the US lockdowns need to be maintained.
Oil prices have been supported by rising road travel as lockdowns ease but international travel has yet to recover.
“The market is in a much better place now than only a week ago. While the market feels more comfortable on the supply side of the equation, on the demand side, the focus will continue to revolve around the risks of easing lockdowns or even the extensions which may not deal a knockout blow to oil prices since this was primarily a supply cut driven rally,” Innes added.
He warned that there continue to be risks of another significant leg down for oil if high global inventories come back into focus as the recovery sags especially if lockdowns get extended.
“OPEC+ continues to signal a willingness to do what is necessary to stabilise the oil price, and that should limit downside. Evidence of proper compliance with the new agreement will be significant, but it is evident to all that the stakes are high, so compliance commitment will remain firm, and more short- term voluntary cuts could be in the offing,” he said.
Oil markets can expect more pain to come in the weeks and months ahead as they face an uphill battle back to “normal”, IHS Markit Ltd said on Tuesday.
The London-based global information provider stated raw market forces unleashed in the energy market by the Covid-19 pandemic with record demand destruction, record supply cuts, record inventory builds, and even for a moment last month, negative oil prices, will have change the fundamentals of supply and demand for years to come.
A new report by the firm sees oil demand returning to “normal” only by the end of 2021.
“It may be hard to comprehend now. But barring a second wave of the pandemic, nearly all pre-Covid demand could return by the second half of 2021 (2H21),” said IHS Markit VP financial services Roger Diwan in a statement.
The firm sees oil demand rising to between 96% and 98% of pre-coronavirus levels by 2H21.
If that transpires, it could even lead to a market squeeze in the medium term as supply destruction hinders the ability of supply to keep up with recovering demand.
“But make no mistake, the road to oil price recovery will likely be choppy and plagued with stop-and-go rallies and selling cycles until some level of certainty is restored,” Diwan added.
IHS Markit’s outlook for the Brent crude oil contract has been revised down to US$35 a barrel in 2020 and US$44 in 2021.
It forecast more downsides in 2020 should the demand doldrums drag into the fall and potential upsides in late 2021 should the inventory overhang gets digested and structural tightness takes hold.