Pogroms in USA can bring oil markets down again

Sixth week of growth in a row

Oil prices significantly rose at the auctions on 5 June in the expectation of the OPEC+ ministers’ meeting on 6 June. Markets hope they would agree to keep cutting production. August Brent futures at 18.00 were sold at $42, with almost a 5% jump during the day. WTI rose by 4,33%, to $39,03, during the day. Both key oil grades of the world ended the sixth week in a row with growth. Ministerial meetings of OPEC and countries that aren’t members of the cartel were going to be on 6 June. Many newspapers cited their sources close to OPEC member states on 5 June and claimed: the fact of appointment of these meetings already meant the agreement of the countries to cut the production in the future more.

This especially refers to those OPEC members who didn’t meet the deal signed in April: we will remind you that the countries were to cut production by 6,085 millions of barrels a day (from 26,7 million) in May and extend these conditions in June too. But the realisation of this deal was just 75%: Nigeria and Iraq restrain the process. Experts expect OPEC+ oil exporters to prolong the production cut to July (this refers to Russia too).

The USA has additional expectations of the production cut: the Mexican Gulf is getting ready for Cristobal hurricane and evacuating workers of oil enterprises from the shelf. According to analysts, about 15% of American oil production is at risk.

Consequently, the more oil production reduces, the more confidently its price will rise, especially amid though a slow but recovery of the demand for oil and oil products as quarantine measures are lifted in the world’s leading countries.

“New balance is appearing”

Albert Bikbov, a blogger and an economist, agrees with the majority of his colleagues: he thinks that the expectation of the OPEC states’ meeting again influenced the growth of prices on 5 June, and serious changes of the position of Saudi Arabia and Russia on production cut were expected.

“Moreover, I don’t know how accurate this information is, but it was said that Iran was going to be persuaded,” the expert says.

But he thinks that a gradual recovery of demand for oil and oil products amid the cancellation of coronavirus restrictions a key factor.

“Now restrictive measures are lifted almost in all leading oil consuming countries, people are going outside, cafes, restaurants are opening. A new balance is appearing. Demand for fuel grows too because during quarantine measures movements were difficult. Some countries have now resumed flights, and the market of oil products is already heating up. There is a wave of optimism, and demand is respectively growing, and the price is rising now,” the economist thinks.

China is the world’s biggest oil consumer. Now, when the Celestial Kingdom is reporting it has launched all the industry and lifted quarantine restrictions, we should suppose that this is the country that is making the biggest contribution to recovering oil demand. However, Bikbov doubts it. He explains that it is an export-oriented country that is very dependent on the world demand for its products. And the world demand hasn’t recovered yet, so the recovery of the Chinese demand for oil will be a delayed effect. It is in the early days to say the sixth weeks of “oil optimism” is determined by China.

Risk factor: “real madness” with street protests

The fragile hope that the pandemic has fallen asleep can be in vain. Bikbov sees the fact that many countries of the world have been seized by a wave of protests that began with George Floyd’s murder in America a big threat. We should remind you that a policeman in the USA strangled a black American who was arrested. The country has been seized by thousands of campaigns of protest against the discrimination of the “non-white” population that were then supported in other countries of the world, for instance, in Britain, Holland and even in calm Sweden. The expert says that this will highly likely provoke a second wave of the pandemic, and not by autumn as it was forecasted earlier but in summer already:

“There is another big ‘but’: the events in America, in London, in Sweden... We see that this madness has seized many leading countries of the world, with people going outside, with total non-compliance with quarantine requirements. Many epidemiologists completely soundly expect a sudden rise in the coronavirus as a result of such a careless attitude of people to their own health. Consequently, the second wave may start not in autumn, as it was forecasted, but in summer already, which means that quarantine and restrictive measures will have to be introduced again. Crowds of millions of people even in Holland gathered in honour of this killed black man! And there is no social distancing. Real madness is taking place now — people let everything go, they are outside, crowd, get down on their knees, apologise to God knows who... So we can have a serious surge in the disease in a couple of weeks or more,” the expert says.

While a new outbreak of the disease and new quarantine measures can bring the world economy to a stall again, and oil rates will collapse again as almost an instant indicator of the market’s health.

What awaits Russian oil companies

Russia’s key exchange oil, Urals, added up 70% in May and significantly played the April fall back. Experts link this against with the renewal of operation of enterprises and gradual cancellation of restrictive measures. But Russia’s oil companies anyway experienced a serious blow, because the coronavirus complemented the March market storm (after the OPEC++ deal failed). In answer to the question about prospects of recovery of Russian oil companies, Bikbov replies with concern: he thinks if the second wave of the pandemic will strike in summer, the return of restrictive measures will reduce the consumption of oil and oil products. And this will influence rates again.

According to him, however, there is another negative factor for oil producers: the famous production cut because Russia also has to participate in it. And this means that oil companies’ infrastructure to make an income is reducing on its own.

“Let’s take Tatneft’s today report for the first quarter. Revenue has fallen by 13%, and net income has decreased twice. We should understand that this report also includes quite favourable the first two months of the year. I think we should get ready for the worst to come, and all Russian oil companies’ report for the second quarter will be by far worse. But our companies are pressed by the OPEC++ deal restrictions. The growth of prices we see, unfortunately, aren’t compensating for the losses because of the oil production cut yet. And companies will be punished for not meeting the restrictions — Russia has already agreed for all oil suppliers in the country,” the economy states.

“The Arabs killed the goose that lays the golden egg”

The information that Arab exporters (Saudi Arabia, Qatar and others) declared war to divide the market appeared in April and May: they not only increased production but also underbid other suppliers with dumping. Albert Bikbov thinks that these actions had a detrimental impact on their own economy.

According to him, Arab countries can increase production by almost a fourth, but a fall of prices associated with it is a great disadvantage for them, there is no compensation:

“The Arabs killed the goose that lays the golden egg. Now they have big problems with budget replenishment because their economy completely depends on oil, it is a monocentric economy. And they didn’t manage to compensate for the oil fall with a rise in production. The rates collapsed, while their budgets were calculated according to oil prices. And now we see articles that describe that they are doing very bad, the Arabs are having big financial problems and now they are praying that oil price will go up. This is why they rushed to the OPEC++ deal with great joy. They anyway put an end to their future, and moreover, they are ready to keep reducing it and urge Russia do the same,” the expert thinks.

The author's opinion does not necessarily represent the position of the editorial