13.07.2020 – Special Report. Long investors had just recovered from the historic crash in April. Since then, the oil price on the spot market has worked its way back up from almost zero to around 40 dollars. But the rebound may soon face bigger problems. We shed light on the background.
Recovery of around minus 37 dollars
The history of the oil market could repeat itself: In the first quarter, traders had long ignored the production quota dispute between Saudi Arabia and Russia and the effects of the corona pandemic and hoped for the best. When the situation finally escalated on 6th March and Riyadh then turned on the pumps, oil contracts even imploded into negative territory until 20th April – WTI traded at minus 37.63 dollars on that day. Only when OPEC+ finally agreed on massive cuts did things start to pick up again. Until now – now there is the threat of turbulence again due to the production volume.
More oil is likely to be pumped soon
This is because a group of oil exporters around Saudi Arabia within R-OPEC+ — that is, Russia, OPEC and some non-OPEC exporters — wants to get the pumps running again. This was reported yesterday by the news agency Bloomberg and the “Wall Street Journal”. According to the report, from August onwards the output is likely to be increased again by around two million barrels. The background is the hope that demand will pick up again after the global corona lockdown.
On Wednesday the expanded cartel wants to hold a video conference on this. All in all, it could result in the drastic reduction in production decided in April being eased from 9.6 million barrels to 7.7 million barrels. We are not the only ones to suspect that this will lead to a well-known evil in the cartel: Fraud. In other words, some countries will not adhere to the quotas because the state treasury is empty.
IEA sees the valley crossed
Especially since the International Energy Agency had spread optimism on Friday: the worst corona effects are over. The latest Oil Market Report stated that the oil price has been remarkably stable in recent weeks. In the second quarter, global consumption fell by 10.75 million barrels per day – this quantity should recover in the second half of the year to only minus 5.1 million barrels per day.
And this is exactly where we come to the possible misjudgement. For one thing, a second, global corona wave continues to pose a real threat to demand for gasoline or kerosene. When air traffic and tourism will return to their old levels is in the stars.
Oil flood in China
On the other hand, there’s another piece of bad news for the bulls: The world’s biggest oil importer is running out of storage – China had taken advantage of the crash in oil prices and stocked up on Crude on a large scale. Last week, the Chinese business medium “Caixin” reported according to “Oilprice.com” that the onshore tanks had reached their maximum capacity. Referring to the figures of information service provider Oilchem China, it said that the tank levels for crude oil had climbed to 69 percent. What sounds as if there is still air at the top is obviously soon reaching its structural limits: according to “Caixin”, experts see the absolute maximum at 70 percent.
Millions of barrels are waiting for oil tankers
In total, the Middle Kingdom is bunkering 33.4 million tons of oil, an increase of 24 percent over the previous year. After massive purchases in May, the situation could become even worse, especially since sales in the traditionally strong refinery industry in Shangdong Province in the east are sluggish.
This means that the flood of oil is back up to the sea. According to Clipper Data, a total of around 70 million barrels are currently floating around off the Chinese coast. According to the analysts, this means that the amount of oil on the so-called “floating storage” has quadrupled since the end of May. This is the highest amount since the beginning of 2015 and seven times the monthly average in the first quarter of 2020. Oil tankers now have to wait 15 to 20 days before they can discharge their cargo.
Regional conflicts threaten oil production
It remains to be noted that there are bullish geopolitical factors for the oil price. The Syria conflict, for example, is still smouldering, with the potential for a regional conflagration if Iran or Israel intervene. Furthermore, the situation in Libya could escalate and cause oil production there to dry up.
And even closer to our doorstep, the danger of war has increased: If Turkey were to drill for oil and gas off the Greek coast, the question is whether Athens would be able to offer it. Furthermore, Ankara could provoke a war if it defends the maritime bar between Turkey and Libya, which has been unilaterally declared its territory. Then a conflict with Greece, the Republic of Cyprus and Israel is imminent – the three countries want to build a gas pipeline to Italy, which runs south of Crete right through the Mediterranean zone claimed by Turkey.
Sealed oil wells
And there are also other reasons for a bullish oil market – but they are more medium-term. For example, the hedge fund Northern Trace Capital sees a price of 150 dollars per barrel by 2025. In an interview with the “Wall Street Journal”, he justified this with the throttling of investments in the oil fields triggered by Corona. JPMorgan expressed a similar view – the bank sees 100 dollars per barrel. In other words, many oil companies have gone bankrupt, some have had to mothball the oil wells. But many producers have no money to reverse this move – and the banks are stingy with loans.
We will see which factors prevail – the Bernstein Bank keeps an eye on the matter for you and wishes you successful trades and investments!
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