Oil prices are unlikely to move much higher from the current levels in the low $40s, at least not for the rest of the year, a growing number of analysts and industry professionals say. Oil has been stuck in a narrow trading range in the low $40s more or less since July after the market began to worry that even with large supply cuts from OPEC+ and curtailments in the U.S., demand will not recover fast and strong enough to draw down the record-high inventories that had built in the second quarter.
This year has been a year of uncertainties on all markets, including the oil market, but it looks as if uncertainties have grown since we entered the second half of 2020, instead of abating as analysts had predicted earlier this year.
Uncertainties about a second wave of COVID-19 and renewed restrictions on social gatherings in several major European economies are weighing on oil market sentiment. China’s ability to continue propping up oil demand with record-high crude oil purchases is also called into question. The U.S. election is another major uncertainty and whatever the result, the markets, including the energy market, will be impacted.
In recent weeks, uncertainties over when (if ever) oil demand will return to the pre-crisis levels have increased with demand recovery basically stalled and China appearing to slow down its oil imports.
A lot of the major players on the oil market, including some of the largest independent oil traders such as Trafigura and Mercuria, have been bearish on oil near term, expecting global stocks to build in the fourth quarter – due to weak demand – before starting to decline. The biggest independent oil trader in the world, Vitol Group, however, was quite bullish two weeks ago. The world’s stockpiles of oil have diminished by around 300 million barrels since peaking at 1.2 billion barrels early this summer, and are expected to decline by another 250 million-300 million barrels between September and December, Vitol’s chief executive Russell Hardy told Bloomberg in mid-September.
But another executive at Vitol, executive committee member Chris Bake, said on Gulf Intelligence’s weekly energy podcast on Sunday that demand is looking more uncertain amid a “huge amount of uncertainty” about COVID-19, economies, monetary stimulus, and oil demand.
“The conventional wisdom going into the fourth quarter was that things were going to improve,” Bake said, noting that “it doesn’t feel like we have a huge catalyst” for the rest of the year.
According to Bake, there is a “big push-pull between the demand and supply side, and the demand side right now looks very uncertain; the supply side probably will need to adjust to that.”
The deteriorating demand outlook comes just as OPEC+ is preparing to further ease – as of January – the current production cuts, leading to speculation that the group is set for a turbulent dialogue in the fourth quarter about its supply-fixing decisions.
There is uncertainty about OPEC+ “holding the line without making another move,” Vitol’s Bake said on the Gulf Intelligence podcast.
Many economies in Europe also face increased uncertainty with surging COVID-19 cases. The City of London’s biggest employers, banks, had just started slowly returning staff to offices, encouraging employees to drive to work with cash incentives or paying their taxi fares, when UK Prime Minister Boris Johnson said last week that everyone who can, should work from home. Banks reversed plans for employees returning to the office, stricter local restrictions are imposed in some areas in the UK, and London faces a local lockdown with a possible ban on household mixing if it wants to avoid a full lockdown. France also announced stricter restrictions last week, while the Spanish capital Madrid is also tightening restrictions but stopping short of a city-wide lockdown.
No government in Europe is inclined to repeat a nationwide lockdown, looking to avoid another devastating economic hit, but local restrictions are already happening.
The uncertainty isn’t helping either consumer confidence or the economy and is stalling oil demand recovery. At the same time, supply is set to grow from Libya after a tentative truce and the re-opening of some of the ports.
If the huge amount of uncertainty in demand persists in the fourth quarter, the OPEC+ group may be forced to review its supply-fixing policy, potentially fracturing the alliance, again.