Oil prices have been in the doldrums: a low $40s trading range for most of the summer.
After a wild and crazy spring, Alaska North Slope crude and Brent prices crossed above the $40 line June 5. ANS crude led Brent for most of the period, stayed over $40, flirted with $45 several times, but never made it above the $44.75 it posted on July 22.
Brent and West Texas Intermediate also traded in a tight holding pattern during June and July.
Price volatility is the lifeblood of oil traders, and the lack of it has sent traders to the sidelines this summer, awaiting more robust price action.
In a tug of war between the historic growth of oil consumption - which will resume eventually - and the COVID-19 related destruction of demand, a standoff has occurred. As long as coronavirus clouds threaten, that dance might continue.
Of course, a trading range can break in the next 15 minutes, as we know. The price will change; that is what oil prices do. An unexpected event can impact prices very quickly, and radically, as we’ve seen this spring. After such a season of calm, perhaps a squall is overdue.
If prices begin to move in a meaningful way, there likely will be volatility, especially in the short term, as the markets shake off lethargy.
No lack of market forcesThe calm price atmosphere may not, however, signal a lack of forces buffeting the markets, but rather a plethora of countervailing forces imposing on the price action.
The Organization of the Petroleum Exporting Countries has been active in 2020, with Russia and a few other cooperating countries flooding the markets in March, and later instituting a record 9.7 million barrel per day production restraint in May, June and July. OPEC plans to ease up on the production cuts in August, with the expectation that demand will improve.
In the United States, much unconventional production has become uneconomic at lower prices, putting the lid on new drilling and completions in the shale patch. Marginal conventional production has been shut in.
Petroleum inventories have waxed and waned.
Oil companies worldwide have slashed capex spending, and projects have been delayed or scrapped, not only due to low prices but due to coronavirus restrictions in the workplace as well.
On the demand side coronavirus restrictions have gutted the market for transportation fuels.
And the coronavirus itself has been a persistent foe. Just as human activity begins to ramp back up, COVID-19 flares up and spreads. New governmental restrictions and fears of the illness continue to keep oil demand in check.
COVID-19 has no cure or vaccine, but the medical community is learning more about how to treat it, some treatments have been successful and optimism is high for new medicines and new vaccines.
Given the depressed price level found now, higher seems like the logical path for prices. Even as non-oil powered transportation is adopted, pent-up demand around the world for a middle-class lifestyle remains a long-term tailwind for oil prices.
When will the doldrums end?Most traders see higher oil prices in the future. The burning question, as always, is ‘when?’
A new Rystad Energy analysis predicts that a partial return of curtailed OPEC+ oil production beginning in August will create a new four-month supply glut of around 170 million barrels that won’t be balanced by demand until December.
“The analysis is based on the assumption that oil demand will not rebound as quickly as previously thought due to the persistent expansion of the COVID-19 pandemic in key markets, or what we call a mild second wave of the virus,” Rystad said in a July 28 release.
The set-up for the OPEC+ production increase seems favorable.
Early in 2020 global oil production was high compared to market demand, but in June global stocks saw some relief of 2.2 million bpd of implied oil inventory draws, Rystad said, adding that July is also “set to end with demand surprisingly exceeding supply by 1.9 million bpd.”
But total liquids demand levels from August to October will stay flat at around 90.5 million bpd, before rising to 92.9 million bpd in November and 94.6 million bpd in December, Rystad said.
Global oil supply reached an “astonishing low” of 86.4 million bpd in June, and will finish July at approximately 88.2 million bpd, Rystad said. The increase from OPEC+ and the reactivation of other global shut-in production is forecast to push supply to 91.2 million bpd in August, 92.5 million bpd in September, 92.9 million bpd in October and 93.3 million bpd in November, before closing at 93.4 million bpd in December.
“We doubt that the market can take the additional production volumes from OPEC+ from August without negative consequences for oil prices,” said Bjornar Tonhaugen, Rystad head of oil market research.
But perhaps the doldrums will persist until prices rise at Christmas. OPEC’s market monitoring committee will be reassessing the market on a monthly basis.