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Analysis News:::2020-10-28T13:08:44

Oil prices are doomed: the worst period is just beginning


Oil supplies have declined sharply in recent months, which allows us to keep world prices for this energy carrier at a more or less acceptable level – $40 per barrel. Still, there is no need to talk about the market's return to pre-crisis times. And as sad as it may sound, oil companies and states will continue to have to limit themselves in production to somehow make ends meet.

The United States is currently one of the main suppliers of crude oil to China. The latter, in turn, forms the largest market for American oil. According to the latest September data from the Energy Information Administration, approximately 1.3 million barrels of US oil were exported to China in May. At the same time, it is very important, but not the only market for the United States. American oil also goes to Canada, but deliveries for the first half of this year decreased by 19% compared to the same period last year. Shipments to South Korea also fell by a significant 27%.

However, in addition to crude oil sales, demand for diesel and jet fuel is also critical to the global oil market. But demand for these market components, which are dominant in the transport and air transport sectors, is also significantly reduced. Since the beginning of September, gasoline stocks have decreased, and the actual demand for motor fuel is below the seasonal norm. John Kilduff, founder of the New York-based energy hedge fund Again Capital, said that a couple of weeks ago there was quite normal demand for motor fuel, but today there is only a decrease in it. And this is directly related to COVID-19: in places where the spread of the disease is at a high level, there will be a maximum drop in gasoline prices.

The same is true for jet fuel: demand is already showing an obvious drawdown. This is understandable because due to the pandemic, air transportation has suffered significant losses. Although demand for jet fuel has always been significantly lower than for gasoline or diesel, it forms a large share of the oil market and showed considerable growth before the pandemic. According to the Wall Street Journal, in December 2019, the world consumed 8.1 million barrels of jet fuel per day. Analysts predict that over the same period this year, global jet fuel consumption will be just 5.4 million barrels per day, meaning demand is expected to decline by a third.

Doug King, chief executive of the British hedge fund RCMA Capital, believes that due to the long-running problems of oil demand, energy prices will not be able to recover for the next few months. Here we can only add that as restrictive measures are strengthened in Europe due to the second wave of coronavirus, the demand for this energy carrier will fall even more significantly than we are seeing now.

OPEC+ members have set a goal to reduce oil production to prevent a free fall in energy prices. However, given all the above, it is worth noting that the cartel is unlikely to reverse this decision in the near future. The organization of the petroleum exporting countries, which has 13 members and 10 allies under Russian rule, has been trying to keep oil prices above $ 40 a barrel since May, given production cuts. But remember that American oil was trading below $ 39 per barrel on Tuesday. In this regard, the organization is in no hurry to raise the offer on the market.

Individual countries that produce black gold would be happy to increase their production and sales to restore their economy, which has been severely damaged by the ill-fated pandemic. Plus, there is a country that can hardly be forced to reduce energy production. We are talking about Libya, which after the civil war has been continuously producing oil for the past few weeks.

In this regard, Iran may well not support the OPEC+ desire to reduce production, although it is a member of it. To date, no one in the organization is going to publicly discuss future exports from this country. The situation concerning Iran should be clarified only after the US presidential election, which is due to be held on November 3. And at the moment, the export of Iranian oil is suspended by the sanctions of the current president, Donald Trump. But if Joe Biden wins the election, he will likely lift most of the bans imposed on Iran.

In general, we can say that given the massive spread of coronavirus in the world, as well as the unpredictability of the situation with Iran, the worst-case scenario not only for OPEC but also for oil prices will not be long in coming and is being implemented in the foreseeable future.

Analyst InstaForex
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