End of 'voluntary' Saudi cuts, no Covid-19 end in sight

In the lead up to the OPEC+ summit on June 6, oil benchmarks continued to rise toward $40 per barrel and subsequently went beyond. Brent even capped $42 levels briefly as OPEC+ decided to predictably rollover ongoing crude production cuts of 9.7 million barrels per day (bpd) - scheduled to end on July 1 - by another month. 

All of it was accompanied by the common din of crude oil demand returning, underpinned by hopes of China reverting to its average importation rate of around 14 million bpd by end-2020. Such an assumption is fanciful in the Oilholic’s humble opinion, as a semblance of normalcy, especially in the aviation sector, is unlikely before Q1 2021. But even that assumption was further punctured by Saudi Arabia withdrawing its additional 'voluntary' cuts of 1 million bpd in June, atop what they were already cutting as part of the OPEC+ agreement. 

To quote Saudi Oil Minister Prince Abdulaziz bin Salman: "The voluntary cut has served its purpose and we are moving on. A good chunk of what we will increase in July will go into domestic consumption."

Be that as it may be, that's bearish joy for those with short positions who can now also count on rising sentiment in favour of a second wave of the Coronavirus or Covid-19 hammering crude oil demand, with rising cases in the U.S. and as well as a fresh outbreak in China. So, oil futures have duly retreated from $40 levels.

However, here's what this blogger doesn't get – how can it be all about a possible second wave, when the initial pandemic is far from over! Just look at the official and anecdotal data coming out of India and Brazil. 

And while European pandemic hotspots might be cooling down, the initial threat is far from over. A crude market recovery remains a long, long way off. The Oilholic reckons it will be Q1 2021 before we get into a proper recovery mode and can think of a nuanced reversal in market fortunes. By that argument near-term volatility is likely be in $30-40 range, unless Covid-19 situation escalates. To assume the only way is up from $40 is pretty daft. That's all for the moment folks! Keep reading, keep it crude!

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© Gaurav Sharma 2020. Image by Omni Matryx from Pixabay. 

Going sideways: Brent & WTI lurk above $40

The market’s huffed and puffed, issues and influences have come and gone but both oil benchmarks – Brent and WTI have done little to escape their current ranges by more than $2 per barrel.

What’s more, if you outstrip the week’s volatility, on a five-day week-on-week basis to Friday, November 20, Brent ended a mere ten cents lower while WTI rose 67 cents. In fact we've been going sideways for over a month now (see graph, above left, click to enlarge).

Expect more of this for some time yet, as oversupply - the overriding market sentiment that has prevailed for much of 2015 - dominates market chatter and will continue to do so for at least another two quarters. With as much as 1.3 to 1.5 million barrels per day (bpd) of surplus crude oil regularly hitting the market, there’s little around by way of market influence to dilute the impact of oversupply.

The OPEC ministers’ meeting, due early December, is the next major event on the horizon, but the Oilholic does not expect the producers’ collective to announce a production cut. Since, all players are entrenched in their positions in a bid to keep hold of market share, it would be mighty hard to get all 12 players to agree to a production cut, more so as the impact of such a cut remains highly questionable in terms of lending meaningful (and sustainable) support to prices.

Away from the direction of the oil price, yet on a related note, Fitch Ratings unsurprisingly expects the macro environment for EMEA oil and gas majors to remain challenging in 2016. “Crude prices are unlikely to recover (soon), while refining margins will moderate from the record 2015 levels. However, cost deflation should become more pronounced and help to cushion the majors' profits,” the agency noted.

While the sector outlook is viewed by Fitch as “generally negative”, the rating outlook is "stable"  as the agency does not expect sector-wide negative rating actions. “Credit metrics of most players will remain stretched in 2016, but this cyclicality is a known feature of companies in this industry, and we will only take negative action where we expect the current downturn to permanently impair companies' credit profiles,” it added. 

That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Chart: Oil benchmark prices Jan to YTD 2015 © Gaurav Sharma / Oilholics Synonymous Report, November 2015.