Faced with gloom and some good news at the same time, crude oil markets continue to be in a quandary.
Retrenchment and lack of capital investment could eventually lead to crude shortages, argued David Messler in a piece in Oilprice.com in June. The shortage could result in firming up of oil prices.
Messler also points out that there’s no current war premium on crude. But that could change. With Iran seizing an oil tanker passing through the Strait of Hormuz, things may heat up in that region, which remains crucially important to the flow of oil.
The United States is also experiencing a continued decline in output. For the week ending Aug. 14, the U.S. oil and gas rig count fell by three to an all-time low of 244, Baker Hughes reported. That’s 691 rigs, or 74 per cent, below this time last year.
The ongoing civil strife in Libya will keep its oil off the market until at least the fourth quarter of 2020, Rystad Energy reports.
And dwindling Venezuelan production is impacting the global crude oil equation.
As a consequence of all this, crude markets could tighten.
“We are seeing a partial recovery in the energy market,” Saudi Aramco chief executive Amin Nasser said last week. Demand for crude oil in Asia has almost returned to pre-pandemic levels, he told Bloomberg.
Laggards in OPEC-plus, from Iraq to Russia, are committing to cut their output as promised. This is music to the ears of crude oil producers.
Supported by all these bullish factors, Brent crude spot prices rose above US$46 for the first time since April on a much weaker U.S. dollar. The dollar index plunged below 94 cents, a level not seen since June 2018. Last week, U.S. refining runs also rose by 42,ooo barrels per day (bpd) to stand at 14.637 million bpd.
Yet oil markets also face bearish pressures. While prices were low in March and April, China was on a buying spree. That may cool now. And according to reports, some 120 million barrels of crude is sitting in Chinese ports ready to be offloaded. That would also dampen Chinese crude purchases.
Iranian crude exports continue to confound the markets. Iran has succeeded in exporting as much as 600,000 bpd and not 227,000 bpd, as was estimated in a U.S. congressional report, NBC’s Raf Sanchez recently said on Twitter. Reports of a China-Iran strategic deal, which includes Chinese buying large volumes of Iranian crude on a regular basis, may also dampen the markets.
The International Energy Agency expects crude oil demand this year to be 8.1 million bpd lower than it was in 2019, revising its earlier forecast downward by 140,000 bpd. Global crude supply, meanwhile, is on the rise, adding 2.5 million bpd in July after Saudi Arabia reversed its voluntary additional one-million-bpd cuts and the United Arab Emirates failed to stick to its quota.
The Organization of Petroleum Exporting Countries (OPEC) is also now estimating still lower demand this year, at 9.1 million bpd, projecting the global economy to shrink by 4.0 per cent, worse than the 3.7 per cent forecast in July.
Despite blips, major oil producers are battling for survival. The recent BP announcement that it would slash oil production by 40 per cent and pour billions into green energy projects indicates the time has come for the BP to wind down its core business, Tom Steyer and Bill McKibben have written.
For an industry already in turmoil, this isn’t good news.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.