Why oil prices are only going in one direction

By Julian Lee

This was supposed to be a time when things were getting closer to normal for OPEC. A recovery in oil demand after the first wave of the pandemic, coupled with a deep slump in U.S. production, was meant to leave the world needing more of its members’ crude. But it isn’t turning out like that.

Two things have conspired against the Organization of Petroleum Exporting Countries. The coronavirus outbreak is threatening to put an already stalling recovery in oil demand into reverse. At the same time, supply is rising from a variety of sources over which it has no control.

Back in June, OPEC projected that demand for crude from its members would be more than 1 million barrels a day higher than it had forecast in December — before Covid-19 even had a name. By October, it had slashed that estimate by 3.75 million barrels a day, or about as much as is pumped by the group’s second-largest member, Iraq.

The world’s failure to deal effectively with the pandemic has seen countries across Europe — from the U.K. and France to Greece — impose a fresh round of restrictions on their populations, including measures such as closing bars, restaurants and non-essential shops and limiting travel. There are concerns, too, that virus cases could spike again in the U.S. after a frenzy of election rallies and post-poll protests, prompting more stay-at-home orders and sapping oil demand there.
On Thursday, England entered a four-week lockdown. Although the restrictions aren’t as severe as those imposed in March — schools and some businesses, for example, remain open — traffic on city streets has already fallen sharply. It is unlikely to drop as far as it did during the first lockdown, as those who can travel shun public transport in favor of private cars, but the decline will still have a measurable impact on oil consumption.

Cold winter weather may help to support fuel demand, but little of that will be in the form of oil. Liquid fuel is not widely used for heating in the U.K. In Germany, where it is more common, consumers have already stocked up ahead of winter — although they may top up tanks ahead of a carbon tax that comes into effect in January. The government there imposed a partial lockdown on Monday.

Even in Asia, where economic activity and oil demand is returning more quickly to pre-pandemic levels, producers are still waiting to see the full benefit. Japan, the region’s third-biggest oil consumer behind China and India, has slashed crude imports by more than one-third since the start of 2019. Imports from the five big crude exporting countries in the Persian Gulf have fallen by almost half.

Its oil imports are likely to remain sluggish near current levels for the rest of year, because refiners have had to import contracted crude volumes despite low fuel demand. That’s resulted in a build-up of stockpiles that will take time to draw down.

The OPEC oil producers are also facing unexpected competition, both from outside the group and within it.

In the U.S., production is expected to pick up in the short term as drilling rates rise and hurricanes abate. A succession of storms crossing the Gulf of Mexico have reduced output there by more than 500,000 barrels a day on average since August 22.

What’s more, American oil exporters are making big inroads into one of OPEC’s core markets — China. In September, the Asian nation imported more crude from the U.S. than from anywhere else other than Saudi Arabia and Russia. Shipments from Iraq, the country’s third-largest supplier last year, have almost halved since May, while those from the U.S. have risen sevenfold. Purchases for the rest of the year are likely to remain subdued as private refiners have used up their 2020 import quotas.

As if that weren’t enough, OPEC member Libya, which is exempt from the group’s output restrictions, is restoring production after opening export ports that were idled by war for most of 2020. The country plans to export more than 800,000 barrels a day of crude this month — about eight times as much as it shipped in August. OPEC hasn’t yet factored that volume into its calculations.

The OPEC+ alliance, which unites the 13 OPEC members and nine external allies (Mexico no longer plays a meaningful role after its refusal to accept output cuts negotiated in April), must consider its next move. The current plan is to ease output reductions on Jan. 1, adding another 1.9 million barrels a day to the market. It is increasingly clear that’s not doable without sending oil prices spiraling lower.

With members already chafing at the restrictions, the group’s next meeting at the start of December is likely to be a tense affair.

This article was originally published by Indiatimes.com. Read the original article here.