By Irina Slav
A seasonal lull in oil trading has kept price movements largely range-bound recently, but this can still change this week as OPEC and the International Energy Agency are due to release their latest monthly oil market reports that should offer a look into how oil markets have been doing. August is traditionally vacation time in much of the northern hemisphere, so trading in oil and oil derivatives last week was subdued, Reuters’ John Kemp noted in his regular column on trading. Yet seasonality was not the only factor. Lack of any clarity about future demand also played its part in dampening traders’ appetite for oil futures.
Even so, oil prices had a strong start to the week after Saudi Aramco reported a positive net result for the second quarter and allocated a hefty dividend of $18.75 billion to its shareholders. The Saudi giant also signaled its optimism about demand, noting in its second-quarter financial report that it anticipated a strong demand recovery in Asia.
Indeed, the start of this week also saw some good news from China: the latest factory activity data suggested industrial activity was closer to reaching pre-pandemic levels, which is always bullish for oil. In a further positive sign, the consumer price index also rose in China, although this was not entirely a result of consumers returning to their pre-pandemic spending habits but rather of higher prices driven by floods in China and the latest outbreak of swine flu.
“The rosy demand outlook, combined with Iraq saying it will cut production by a further 400,000 barrels a day to compensate overproduction over the past three months are overshadowing the stimulus deadlock in Washington, at least for now,” City Index analyst Fiona Cincotta said in a note as quoted by MarketWatch on Monday.
And yet the uncertainty surrounding the course of the coronavirus pandemic with all its adverse effects on any business activity continues to weigh on optimism, keeping any price gains modest. The United States—the world’s largest oil consumer—has come to account for a quarter of all cases globally, and deaths are rising although at a slower pace than earlier this year. In Europe, outbreaks are flaring up in many countries, causing a tightening of movement restrictions. Asia is also seeing flare-ups of infections.
Against this backcloth, the earnings season among oil companies was pretty much as bad as expected. Most majors reported losses, everyone reported spending cuts, and many are planning changes to their business models in order to weather this particular crisis, which is proving itself to be a crisis like no other.
All supermajors with the marked exception of Exxon revised the value of their assets after the devastating second quarter, indicating they expected a few more quarters of subdued oil prices, at least. Some, like BP, are even preparing for a lower-forever scenario and pivoting to low-carbon energy and LNG. And everyone is cutting their long-term oil price projection.
Amid these revisions, Saudi Arabia’s oil giant said yesterday that it planned to increase its oil production capacity by another million barrels daily. The announcement could be an indication the Kingdom expects a strong rebound in oil demand and even growth in the observable future. This would suggest a marked departure from most of the industry, which is taking the cautious approach from here on out.
Even with this caution, however, oil activity is also on the increase in the U.S. as well. The weekly frac spread count updates from Primary Vision that come out weekly show fracking activity was up from earlier this year despite a fall in the rig count. There is certainly reason for optimism, but then again, there is a reason for caution as well.