Global oil market: when the period of low prices to end?

This year, oil prices, which provide a significant part of revenues to the Russian budget, are being in an area of enhanced turbulence. However, most experts agree that the most stressful period of 2020 has passed, and in the near future, until the end of the year, “black gold” will only become more expensive up to $50 per barrel. Read the details in the analytical material of Finam Group for Realnoe Vremya.

Reduced consumption

Restoring the balance of oil production and consumption creates prerequisites for further growth of prices for the “black gold”. After a significant reduction in the first half of this year, global oil and liquid fuel consumption is gradually recovering and, according to the US Energy Information Administration (EIA), will reach 97,5 million barrels per day in the fourth quarter.

The EIA predicts that by the end of 2020 global oil and liquid fuel consumption will average 93,1 million barrels per day, which is by 8,3 million barrels per day lower than last year and corresponds to the level of the first quarter of 2015. It is noteworthy that at that time the price of Brent crude oil was in the range from $45,2 to $63 per barrel (the average is $54,1 per barrel).

In the fourth quarter of 2020, the volume of global oil consumption will exceed the volume of its production. As a result, the accumulated reserves of the “black gold” will continue to decline. In 2021, the EIA expects global oil consumption to increase by 6,5 million barrels per day and production to increase by 4,7 barrels per day, which will equalize the values of these indicators.

It should be noted that the volume of oil reserves in the OECD countries, measured in days of consumption (days of supply), jumped in March 2020 to the level of 85 days, while in 2019 this indicator did not exceed the value of 63 days. Nevertheless, after the gradual lifting of quarantine restrictions in most countries in the second quarter of this year, economic activity in the world began to recover, as a result of which crude oil stocks began to decline. For example, in July 2020, the global reserves of “black gold” fell to 74 days and, according to EIA forecasts, by the end of 2020 they will be reduced to 67 days, and in 2021 — to 64 days.

Thus, in the fourth quarter of 2020, the oil market is expected to eliminate the imbalance in oil production and consumption due to the growth of the latter and the reduction of the “black gold” reserves, which is highly likely to contribute to an increase in oil prices. Global consumption of “black gold” may return to the levels of the first quarter of 2015, when the average price of Brent crude oil was $54,1 per barrel.

Speculative sentiments

By the end of the year, speculative sentiments in the oil market may change for the better. Certainly, this will primarily be facilitated by restoring the balance of oil production and consumption. On the other hand, the market may respond positively, for example, to additional measures to support the economy by central banks and the governments of leading countries, or to news about the successful results of tests of vaccines against COVID-19, the emergence of new effective ways to treat coronavirus. Until the end of the year, these factors will determine the movement of prices for “black gold”.

According to the Commodity Futures Trading Commission (CFTC), the volume of net speculative positions in crude oil, calculated as the difference between the total volume of long and short positions, has decreased by 10,2% since the beginning of September, to 449,400 contracts. At the same time, the price of Brent crude oil decreased by 5,6% to $39,98 per barrel over the same period. The downward trend in long positions in crude oil has been observed since mid-June of this year, and only increased with the onset of autumn.

In the futures market, since the beginning of August, there has been an expansion of contango for oil futures contracts (a higher value in the future relative to the current price) after its significant reduction since May of this year, when the spread between the prices of 1-month and 13-month contracts exceeded $7,50 for Brent crude.‑ It should be noted that the presence of contango is typical for the “bearish” (falling) phase of the market and makes it profitable to rent tankers for storing oil in order to sell it in the future at higher prices.

However, the expected balancing of global oil consumption and production may lead to a reduction in contango, which in turn will reduce the profitability of the designated strategy for creating excess oil reserves.

Viewing beyond the “event horizon”

Much of the recovery in oil demand will depend on our habits, social and economic situation. For example, a drop in oil demand is caused by a decrease in the number of flights and remote work. On the contrary, the growing love for SUVs and slowing down the process of updating old cars help to increase consumption. If the fight against the pandemic takes longer, demand may not recover until the pre-crisis period.

A recent OPEC report states that demand for oil in developed countries will fall in the coming years. The main catalyst will be the growth in the number of electric vehicles. In developing countries, the demand for oil, on the contrary, will grow. This will mainly be due to the formation of a middle-class stratum and the growth of consumption.

By Finam analysts

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