It has been one heck of a roller coaster ride in global crude oil markets this year. A temporary Russia-Saudi Arabia price war, a monumental crash in demand, and a supply glut. And, of course, who can forget about price movement in 2020? After kicking off the roaring twenties 2.0 above $65 a barrel, West Texas Intermediate (WTI) prices cratered to as low as -$40.32 in April. This is the first time in history that oil prices crashed to below zero. Since then, WTI has recovered to as high as $43, but prices have been trending downward in recent sessions, slipping below $40 per barrel. With only a few months of the year left, what is the state of the energy industry today?
A Saudi Discount
Saudi Arabia announced that it would be lowering the official October selling price for Arab Light grade crude that it sells to Asia and the United States. This would represent the second consecutive month of price cuts for Asian importers, and it would also be the biggest drop in five months.
The move signaled that there is diminishing demand for Saudi oil – both in the United States and China. The United States is still pumping out more than ten million barrels per day, and recent Baker Hughes data suggest the oil rig count is beginning to climb gradually. Chinese refiners spent most of 2020 stockpiling cheap crude in the aftermath of the market crash and the Coronavirus pandemic, so it is understandable why the world’s second-largest economy is buying fewer amounts of Saudi crude.
In August, Chinese oil imports came in at 47.48 million tons, down from a record high in July. Riyadh exported just 177,000 bpd to the United States, the lowest number in 35 years. Early estimates suggest that U.S. imports of Saudi crude will plummet to about 140,000 bpd in September. Plus, it is not looking good for the Saudis in October because the volume of crude loaded on tankers heading to the United States has been lower than usual.
Good Old Supply and Demand
Russian Deputy Energy Minister Pavel Sorokin recently told a local newspaper that international crude demand would not return to pre-pandemic levels for another two to three years. This analysis was supported by a recent assessment from industry observers.
According to a new report from the International Energy Agency (IEA), the oil recovery has stalled because of lackluster demand. In its latest Oil Market Report for August, the IEA revised its crude consumption forecast downward by 140,000 bpd from the previous month, which was also the first downgrade since the spring. Overall, the organization projects that crude demand this year would be 8.1 million bpd lower than it was in 2019.
Keisuke Sadamori, the director of Energy Markets and Security at the IEA, told Reuters that there has yet to be a significant drawdown in the global supply glut. The IEA does not anticipate a steep slowdown in demand, but the pace of declines in inventories might not be enough to sustain the current market. Sadamori alluded to an insufficient “pickup in refining activity, and jet fuel is the big problem.”
The Organization of the Petroleum Exporting Countries (OPEC) downgraded its forecast, too, citing struggling fuel demand and uncertainty in the broader economy amid the COVID-19 public health crisis.
U.S. consumer demand might also take a huge hit as the summer driving season comes to an end.
The chief obstacle for the recovery could be output. Last month, OPEC and its allies – OPEC+ – tapered its production cuts by as much as two million bpd. This means the cartel and its partners will be producing more oil. Stateside, new Rystad Energy data highlight that many oil and gas companies are reactivating shuttered production facilities this month as operators need prices to hover between $40 and $50 to be profitable, compared to the more than $60 overseas.
This could explain why hedge funds have raised their net short positions over the last month, according to numbers from the Commodity Futures Trading Commission (CFTC).
Crash or Correction?
Were crude prices due for a slight correction? Could a resurgence of the Coronavirus in the upcoming cold and flu season affect oil markets at home and abroad? Are Chinese imports on a permanent decline? There are many more questions surrounding the industry, but it is often said that you should follow the money to determine the short- or medium-term future of any market. With the power players placing their bets against an energy recovery, perhaps it would be appropriate to refrain from being bullish on the oil and gas sector returning to its glory days anytime soon. You may not enjoy that cup of Texas Tea.
Read more from Andrew Moran.