On Monday, OPEC’s relaxation of its historic production cuts began—and oil prices responded by falling as the market braced for more oil. Monday morning’s price slide highlights the power of OPEC, even as U.S. shale production pushed the country’s total output higher and higher over the last couple of years, causing some to debate the influence of OPEC on global oil markets.
OPEC+ agreed in April this year to slash its combined production by a record 9.7 million barrels daily until economies emerged from their coronavirus lockdowns in the hope that this would go hand in hand with an improvement in oil demand. Data from China gave some cause for optimism in this department, but the latest news has been discouraging, with traders having to discount their crude to sell it in the world’s largest importer of oil.
India is not faring much better. Reuters reported this week that fuel demand in Asia’s other powerhouse was down 21 percent in July year on year and 13 percent compared to June last year. The country has been among the hardest hit by the pandemic, with more than 1.8 million people infected and more than 38,000 deaths. This has prompted new lockdowns, sparking fears that this could happen elsewhere as well, weighing on prices.
Imports of crude oil into India dropped to a five-year low in June, Reuters reported this month. Before, that was okay because China’s imports of crude that month jumped to a record 12.9 million bpd. But now, with indications that China is becoming saturated with oil with demand not rebounding as fast or strong as many hoped, the Indian data becomes all the more relevant.
“Speculators appear to be getting more nervous about the demand recovery, with the path much more gradual than market expectations coming into the second half of the year,” ING strategists Warren Patterson and Wenyu Yao said on Monday.
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“As OPEC+ begins to raise its production, the economic outlook is still uncertain and largely tied to the evolution of the Covid-19 virus,” BNP Paribas’ head of commodity strategy Harry Tchilingurian told Bloomberg. “Concerns appear to be developing that a rise in OPEC+ production will coincide with an uneven recovery in oil demand.”
OPEC+ itself does not seem all too concerned. Russia’s Energy Minister Alexander Novak said two weeks ago that he expected a significant rebound in oil demand this month, to within 10 percent of pre-crisis levels. But Novak did not elaborate on how exactly this would happen. OPEC, for its part, began raising its production in July ahead of the expiry of the deepest cuts. According to Reuters, the cartel’s total in July was 970,000 bpd higher than it was in June, when output hit a historic low.
And yet Saudi Arabia has said it will not increase its exports this month, suggesting that there is still a sense of caution in the group. Not without a good reason, either.
“I think we’re witnessing kind of a high-wire … balancing act that OPEC+ is trying to execute here,” the chief strategist of JTD Energy Services, John Driscoll, told CNBC earlier this week. “Now they’ve restored the balance, prices have recovered, but they have to be very careful because they don’t want to be the victim of their own success,” he added.
It is indeed a precarious situation and not just for OPEC. Nobody knows where demand will go in the immediate term, and there are doubts for the medium and long term as well. Uncertainty is the new normal, and this new normal is keeping prices around $40 a barrel. It will be a while before the effects of OPEC+’s relaxed cuts show up in data on demand and supply, but when they do, they are likely to be negative as the coronavirus continues raging in all of the biggest importers of oil with no end to it in sight.
By Irina Slav for Oilprice.com
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