Oil market likely to see slow recovery despite easing of lockdowns

Despite welcomed consensus from OPEC oil ministers and other producers last weekend, the market remains over supplied and the price is struggling this week. In Friday trading, Brent crude was priced above US$38 with WTI holding around US$36 a barrel. OPEC+ met by video conference to decide on an extension of the current 9.6 million barrels a day until the end of July. Short term remedy With Mexico unable to participate, 100,000 a day was taken off the total number. The market rallied in advance of the news last weekend, but looking at the hard figures, this move is seen as a short-term remedy, not a solution. Leading non-OPEC proponent and Oman’s energy minister, Mohammed Al-Rumhy told S&P Platts that this month by month monitoring of the fundamentals was not ideal, saying it would be difficult to plan and “the market dynamics of a month-to-month adjustment in production doesn’t really work”. With no better offer on the table, producers will have to comply in the short-term. Stricter compliance to the agreed cuts was high on the agenda of this meeting with the Saudi Arabia minister, Prince Abdul Aziz Bin Salman calling for unity and better commitment, particularly from Iraq and Nigeria. Iraq’s newly appointed minister, Ihsan Abdul Jabbar Ismaael confirmed his country’s full commitment and agreement to the cuts. S&P Platts say OPEC+ managed to comply 85% last month. Looking ahead to the next two quarters of the year, the president of Prestige Economics, Jason Schenker said he expects the market to strengthen "but global demand will be most critical for supporting oil prices". COVID-19 impact The impact of Covid-19 is still being felt, despite a slow re-opening of many economies. Schenker says that “OPEC+ policies can seldom support prices on their own during period of very weak demand,” and as economies contract, the downtown is likely to be prolonged. While unemployment figures in the US looked less threatening with 2.5 million jobs added in recent months, global oil-intensive activity remains stagnant. There’s general consensus that strength will return to the oil price later in the year as demand returns. Investment banks are already changing their estimates with Barclays Commodities Research expecting Brent crude to trade around US$41 a barrel in the third quarter. That’s an increase of US$4 from their previous estimation. In a research note, the bank cautioned about a slow recovery, despite easing the lockdown, saying it expected fundamentals “to moderate significantly as incremental demand improvement will depend on more consumer behaviour than the easing of enforced movement restrictions". Nervousness of market Reports of a second wave of the Covid-19 in some countries will add nervousness to the market. Over-supply in the market remains a threat at the moment but with some production shut in and demand slowly recovering, the CEO of CMarkits, Yousef Alshammari estimates that markets may actually be  undersupplied “by more than 5 million barrels a day in August,” with global demand still around 88 million barrels. Oil demand has been picking up slowly in recent months, but global inventories are still high at around 2 billion barrels. In the event of any new Covid-19 setbacks, demand could reverse quickly.  Alshammari says that US  gasoline demand is already back at around 82%. Just as OPEC + agree to hold back production, reports from the Libyan Oil Company say they are getting ready to re-start production after civil unrest in the country shut down the oil fields.  The Sharara oil field has about 300,000 barrels a day capacity, but the company is looking at 30,000 barrels a day to start, claiming they can be back at full capacity in three months. We can expect volatility in the oil market for the next couple of months as the economy cautiously returns to some sense of normal activity. OPEC and friends will be monitoring the market closely as few other options present themselves in order to maintain some sense of stability on the supply side.