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. 

Two crude charts that say it all

We are nearly at the end of the third quarter of the current oil trading year and the Oilholic has two relevant charts for you. The first figure below (click images to enlarge), offers a glimpse into the OPEC Crude Basket of its member exporters' prices, and it is currently averaging just shy of $65 per barrel. 

The second figure tracks the Friday closing prices of oil benchmarks year to date, which points to the fact that oil futures, while volatile, are still oscillating in a fairly predictable range, unable to breach a $50 per barrel floor or meaningfully escape a $70 per barrel ceiling.

Figure I

Figure II

As this blogger has said before; oil prices remain range-bound and are going nowhere fast. Keep reading, keep it 'crude' folks!

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© Gaurav Sharma 2019. Charts: Figure I - Direction of OPEC's crude basket. Figure II - Friday closes of oil benchmark prices, year till Friday, 23 August, 2019  © Gaurav Sharma, August 2019

On crude 'slumps', 'spikes' & predictable ranges

Over the last 12 months we've heard of oil price spikes and slumps, ups and downs, four-year highs and six-week losing streaks, and exaggerated predictions of $100 per barrel crude prices, being made by those prone to making them and then getting them spectacularly wrong. 

Yet, as the Oilholic hears Saudi Oil Minister Khalid Al-Falih [suggest a 2019 OPEC production cut might be on the horizon] on TV while sitting in a hotel room in Altanta stateside, the inescapable fact is that Brent, WTI and OPEC's own basket price of crude oil(s) exported by its members remains as range-bound as ever (see graph, click to enlarge). 

Whichever way you look at it - all year the price has fluctuated within a $60-80 per barrel range. You can come up with all sorts of fancy, creative explanations about it, as both the bulls and bears have, but the market is where it is because the physical traders are at peace with the supply demand and dynamic as it stands. 

While speculators and money managers, especially hedge funds, might pile into the market at the slightest sign of an uptick in the hope of extending the rally, physical traders (at least the ones the Oilholic is in contact with in Amsterdam and Shanghai) aren't exactly sweating while looking at their solver models that point to no scarcity of supply. 

Given that dynamic, paper market panics don't last long as recent weeks and months have proven. End result - everyone from Morgan Stanley to RBC Capital Markets, and all the so-called price prophets in between, are scrambling to downgrade their oil price forecasts. Some have even gone to the other extreme predicting $40 per barrel oil prices, and that won't happen either. 

Using an aggregate of global demand growth from various data sources (OPEC, EIA, IEA) and squaring it against global supply (as it stands) - the oil price will likely remain range-bound in the $60-80 bracket. So keep calm and carry on! That's all for the moment folks. The Oilholic needs to head out and brave the rain in Altanta, more from here later. 

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© Gaurav Sharma 2018. Graph: Friday closes of oil benchmarks (Jan to YTD 2018) © Gaurav Sharma 2018