The volatility of the dollar is also transmitted to oil. But beyond the price fluctuations from one session to the next, there is an underlying pessimism that has returned to emerge and which blurs the prospect of further strengthening of the market.
Crude oil prices had not taken off even when Hurricane Laura closed the platforms in the Gulf of Mexico, reducing US production by 1.6 million barrels per day.
In the following days they collapsed, only to lose over 4% on Friday 4, when – for the first time in a month – the WTI folded under $ 40 a barrel, a significant threshold also for the choices of shale oil companies. Meanwhile, Brent fell below $ 43.
The stock market correction contributed to the latest sell-off: Wall Street suffered a new thud after that of Thursday 3 and for global equity markets in general it was the worst week in the last three months. Everything is held. And behind it all there are the uncertainties about the post-Covid recovery.
But it is also the oil market fundamentals that have deteriorated: supply is probably rising too fast, in the face of demand that – after a brilliant but still incomplete recovery from the lows of the lockdown – is now slowing down.
To understand what will happen (to prices and beyond) China is, as always, a key factor. It is above all the Asian giant that has driven oil demand in recent months, importing record quantities of crude oil, as much as 13 mbg in June. But purchases – of an opportunist nature and destined largely to fuel stocks – are decreasing: even some cargoes would have been re-exported. And the slowdown now risks becoming even sharper, because space is starting to run out in Chinese storage tanks and many small private refineries – known as “teapot”, or teapots – have run out of import quotas.
The congestion of ships in front of the ports of the People’s Republic – which had resulted in waiting up to four weeks to unload – could fuel the illusion of robust imports for a while longer. But from October, we are likely to see a 1-2 mbg drop, warns Reuters analyst Clyde Russell.
Meanwhile, the other major Asian consumers, India in the lead, are still far from pre-Covid import levels. And in the US (only partly due to hurricanes) fuel consumption has returned to decline.
There are numerous signs that make operators nervous, also on the supply side, which again is feared that it is excessive compared to the requirement. And the concern begins to reflect on the positions of hedge funds (the bears are on the rise at Nymex), as well as on the price structure. Brent Dated, benchmark for the physical market, it’s just back in lightweight contango over a 5-week horizon: in practice, mid-October crude costs more than spot oil.
Opec Plus, as envisaged by the agreements, began to lighten the production cuts, bringing them to 7.7 mbg from 1 August (the reduction previously was 9.7 mbg and should go to 6 mbg from January). Countries that do not respect limits, such as Iraq and Nigeria, have been imposed greater discipline and even the recovery of cuts not made so far: a rigor that has resulted in levels of “compliance” never achieved in history. However, the success was not complete.
Baghdad in recent days has asked for a two-month delay, until November, to complete the recovery of the backlogs: we will see what concessions it will be able to obtain, at the next meeting of the monitoring committee on cuts, on 17 September.
But the real problem is that in the meantime Russia – a decisive ally of OPEC – seems tempted to relax its commitments. On Wednesday 2, the Minister of Energy, Alexandr Novak, said that oil demand is now 90% of the pre-Covid level and that Moscow will propose to Opec Plus to “react accordingly”.
He returned to the fray on Friday 4, saying he expects oil to recover an average value of $ 50-55 a barrel in 2021, thanks to further improvement in demand in the months to come.
Moscow is also quickly restoring production: in August it extracted 5% more than in July, or 9.86 mbg including condensates (exempt from limits, but the exact quantity of which is not known). Moscow’s share, referring only to crude oil, is 9 mbg.
Meanwhile, US shale oil producers are also tempted to step on the gas again. With oil prices more than doubled from their April lows – when the WTI had even fallen below zero – the number of drilling rigs in operation has started to rise again: now they are 181 (256 including those for gas exploration) according to Baker Hughes. still over 70% less than a year ago, but up from the low of 172 reached in mid-August.
In the absence of market reversals, US production could recover share in a few months.