Friday, 29th March 2024
To guardian.ng
Search

Second wave of pandemic poses risks to oil rebound

By Femi Adekoya
14 July 2020   |   3:26 am
As countries brace for a second wave of the coronavirus spread, analysts have warned that an unexpected hit to demand could derail oil prices, as producers are yet to reduce their stock builds

As countries brace for a second wave of the coronavirus spread, analysts have warned that an unexpected hit to demand could derail oil prices, as producers are yet to reduce their stock builds in the last quarter.
 
Similarly, warnings of massive storage build-ups have re-affirm fears that the worst may not yet be over for oil prices.
  
Analysts at Cordros Capital and S&P Platts warned that any shock to demand will present quite a conundrum for an already stretched OPEC+.
  
In the wake of the lockdown in April, Nigeria had in a desperate effort to offload and sell stranded barges of oil, offered oil traders huge discounts on its crude grades below the $10 mark, as glut and energy imbalance triggered by the COVID-19 hit the oil industry.

 
Brent Crude traded lower yesterday at $42.95 per barrel at 4:35pm local time, while Nigeria’s Bonny Light traded at $43.63 per barrel, down by 0.14 per cent.
 
Indeed, OPEC slashed its crude output in June to a three-decade low, according to an S&P Global Platts survey, as the bloc and its allies, including Russia, continued a campaign to tighten the oil market in its emergence from the depths of the coronavirus crisis.
   
OPEC’s 13 members pumped 22.31 million barrels per day (b/d), the Organization’s lowest collective output since September 1990, when the launch of the first Gulf War nearly wiped out crude oil production in Iraq and Kuwait, the survey found.
  
Including its 10 partners in a historic supply accord, the alliance known as OPEC+ delivered 106% of its committed production cuts, according to Platts calculations, a rise from May’s 85%.     
 
The combined output of the 20 OPEC and non-OPEC countries with quotas under the deal was 10.32 million b/d below their late 2018 reference levels, meaning the coalition took more than 10% of pre-pandemic oil supply off the market.
  
For Cordros, the accelerating spread of the COVID-19 virus across the United States is a significant headwind and threatens another downturn in oil prices.
  
“The U.S. is not alone as the virus continues to spread like wildfire across the globe, notably in Brazil, India, and even here in Nigeria. In our 2020 Mid-Year Outlook, we forecast a slight rebound in demand over the course of H2-20.
   
“However, a widespread ‘second wave’ will mean another hit to crude oil demand, and poses a significant risk to our scenario of a steady tightening trajectory.
   
“We note that with a second wave, we are not likely to see demand destruction in the same way as when the first wave hit, as we expect that most governments will refrain from imposing strict and far-reaching lockdown measures, this time around. In our view, optimism about a steady improvement has driven markets over the last two months,” the analysts added.
 
The analysts noted that while the one-month extension of the production cut agreement will expire by July end, with the group signalling a desire to ease production cuts, from 9.70mb/d to 7.70mb/d in August, additional 2.0mb/d worth of supply into the market as demand weakens, would be sub-optimal for crude prices.
    
“At the same time, producers are itching to reopen the taps, e.g. Angola is already resisting pressure by OPEC for a steeper oil output cut to comply fully with record supply curbs.
  
“As we highlighted in our Mid-Year Outlook, OPEC+ still has massive storage build-ups, which we only expect to begin to fall in Q4 – to combat.
  
“In our view, a ‘second wave’ will lead to further increases in inventories. Without the ability to drain them, combined with a widening divergence between supply and demand, we reiterate that there is little room for oil prices to rise,” Cordros’ analysts added.
   
Iraq, which has been the target of ire by OPEC+ counterparts for its historic non-compliance, made a big reduction in its output to 3.70mb/d, a nearly five-year low. While that remains above its quota of 3.59mb/d, the country has pledged to make up for its overproduction later this summer with extra cuts.
  
Nigeria made the same pledge, with its June production averaging 1.58mb/d, above its cap of 1.41mb/d, according to the survey.
  
Several other African countries also breached their quotas and will likely face pressure at the JMMC meeting to improve their performance.

0 Comments