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Analytics, 18 September 2020

Will the oil market stabilize anytime soon?

Oil demand is likely to remain low and so will prices. Several significant events have happened since the start of September, adding to the bleak outlook for the oil market. With global demand remaining low due to the COVID-19 pandemic flare-ups across the globe, major producers slashed their prices on demand weakness, oil giant BP released a report forecasting a bleak outlook for the oil market, which as later reflected in the OPEC report and the recent meeting between OPEC and OPEC+.

Will the oil market stabilize anytime soon?

Price cuts

The price cuts were started by the world’s largest crude oil exporter, Saudi Aramco which on Sunday, September 6, slashed the price for October oil. Abu Dhabi National Oil followed suit on Tuesday, September 8, cutting prices and reiterating the region’s market slump.

The price cuts kicked off a selling spree that led both the International Benchmark Brent Crude and the US benchmark West Texas Intermediate (WTI) to their lowest levels since June. Both contracts retreated below $40 per barrel at their lowest points in the session on September 7th. In April, WTI plunged into negative territory for this first time in history that week, trading below $0 (dropping by up to -$40.32) per barrel.

Prices have since moved above $40, with Brent crude trading at $43.46 a barrel on Thursday afternoon (September 17), while the U.S. WTI crude stood at $41.12.

According to a Bloomberg report on the price cuts, the difference between Brent for December this year and next is now the biggest since May. That structure, known as contango, suggests traders continue to be concerned about the market outlook in the coming months. It’s a similar picture for WTI too.

BP Energy outlook

On Monday, BP reported in its annual BP Energy Outlook 2020, that noted that oil demand may have peaked in 2019. Last year, BP theorized that peak oil demand could occur by 2030. In a major shift, the Energy Outlook 2020 noted that the peak demand may have already happened.

In the Energy Outlook 2020, BP outlines three different scenarios for energy demand over the next 30 years, all of which predict a decline for oil demand through to 2050.

In two of these scenarios, a “rapid” transition case and a more aggressive “net-zero” case, the changing winds of the energy landscape coupled with the economic toll of the COVID-19 pandemic will mean that global crude demand never again surpasses 2019’s average of around 100 million barrels per day. Along these lines, the models suggest that 2019 could also mark the peak of carbon emissions from energy use.

During these two scenarios, policymakers are likely to impose more aggressive measures to significantly reduce carbon emissions. The biggest difference between the two is that the net-zero scenario expects energy consumers themselves will move the needle even more by changing their behaviors and energy-consumption preferences.

These would result in low oil demand which eventually leads to oil failing to recover from the coronavirus crisis. By 2050, these factors could lead to global demand dropping as low as 55 million barrels per day to 30 million barrels per day. BP itself ditched oil exploration projects and aims to transition into a zero-net company by 2050 or sooner.

OPEC and OPEC+ meeting

Just as BP’s report was being digested, the OPEC and non-OPEC allies (OPEC+) met on Thursday to review the market and discuss compliance with deep production cuts.

OPEC released a report cutting its global oil demand forecast by 400,000 bpd for 2020, predicting an average demand drop of 9.5 million bpd compared to its previous estimate of 9.1 million bpd. It predicted demand to grow by 6.6 million bpd in 2021, which was also 400,000 bpd lower than its previous estimate.

Both BP’s outlook and OPEC report suggest that the U.S. will face significant constraints in bringing oil demand back online but are slightly more optimistic about European and Chinese Demand. OECD oil demand is expected to slowly recover, but demand from the aviation industry is unlikely to bounce back anytime soon. OPEC+ did not announce additional output cuts at Thursday’s meeting, which was in-line with analyst expectations. The meeting emphasized ongoing flexibility as oil prices continue to trade at depressed levels.

In July, the energy alliance agreed to cut output by 7.7 million barrels per day from August through to December, in an effort to prop up oil prices by limiting supply.

Future outlook

Oil prices have dropped more than 35% since the start of the year. Global oil demand may not get back to pre-virus levels for another two to three years, Russian Deputy Energy Minister Pavel Sorokin told the Rossiyskaya Gazeta newspaper, according to a Bloomberg report.

However, while BP’s Energy Outlook 2020 has made bigger waves, there are several reasons that its projections should be viewed with skepticism, notes Cyril Widdershoven in the Oil price.

First, at present, the demand destruction we are witnessing has been driven by COVID-19, a Black Swan event that will – at some point – subside. In the meantime, many seem to forget that the demand picture was gloomy even before COVID came along, with too much oil on the markets and in storage. Eventually, IOCs and OPEC will have to act to counter this oversupply, and when they do, demand will react positively.

Second, the demand for energy and electricity is growing, not in OECD countries but outside, mainly in India, China, MENA, and Africa. These fundamentals are unavoidable. The economic and trade disruptions caused by COVID could even boost oil and gas demand, as a possible redistribution of regional production centers from the current China focus could increase the energy demand for transportation.

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