By Irina Slav
Appetites for oil and oil product trading are waning amid a seasonal slowdown and continued uncertainty about the immediate future of demand and how the coronavirus pandemic will develop. Reuters’ John Kemp reported in his weekly column on oil trade that funds bought some 24 million barrels of oil equivalent in the week to July 14, a reversal of net sales of 21 million barrels in the previous week. Buying may in itself be a positive for oil, but the amounts that are being bought reinforce the impression of a cautious market. And it has good reasons to be cautious.
New Covid-19 cases in the United States are surging in many states, fueling fears that the pickup in oil demand in the world’s largest oil consumer will be cut short by new lockdowns. The authorities in some of the hardest-hit cities are hinting they would not be opposed to new lockdowns. But for now they are meeting with opposition from state authorities. If things continue getting worse, however, new stay-at-home orders are not out of the question.
Such a development would dampen already damp demand for fuel, hence crude oil. Even drawdowns in gasoline stockpiles, as reported by the Energy Information Administration over the past few weeks, were not enough to spur a greater appetite for oil trading as record-breaking infection numbers cast a shadow over the future of oil consumption.
There was also an element of betrayed expectations. Many traders with a bullish view of oil and gasoline expected demand for oil to boom this summer driving season as, presumably, people would shun air travel for their personal vehicles, Seeking Alpha author Tristan Brown noted in a recent article. This did not happen, however, weighing even more on trading appetite.
To add more fuel to market worries, OPEC+ said it would start easing its production cuts from next month. The expanded cartel had agreed to cut 9.7 million bpd of crude oil output in May and June, initially, but later extended the deep cuts by another month. Now, according to OPEC+, demand and supply are much closer to balancing, so there is no point to further extend the 9.7-million-bpd cuts. The next round of cuts will average 7.7 million bpd. These cuts will remain in effect until the end of 2020.
All in all, there isn’t a whole lot of good news for oil bulls, except another update on a coronavirus vaccine, this time the one developed by AstraZeneca and the University of Oxford. A recent update said the vaccine had shown promise in early human trials, which pushed oil price slightly higher. However, there is a long way from early human trials to the marketing of any vaccine, so the reaction of traders was one driven more by optimism than any solid grounds for oil demand growth expectations.
There was also a piece of good news from the shale patch: Chevron said it had struck a deal to acquire Noble Energy for $5 billion in an all-stock deal. Including Noble’s debt, the deal is worth $13 billion, the supermajor said. This is the first major acquisition in the space since the start of the year and it has given some cause for optimism for the future of U.S. shale, even if there are voices arguing it may have peaked already. What’s more, the Chevron news is a mixed blessing: some have taken it to mean that the company is about top start ramping up production in the shale patch, which would weigh on prices.
With the persistent—and even deepening—uncertainly about crude oil demand amid the continuing pandemic this summer is likely to be an even slower one for oil trading than usual.