Oil Prices Are Only Going in One Direction
Fresh Covid-19 lockdowns are likely to reverse an already stalling recovery in oil demand, just as the U.S. and Libya pump more crude.
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.
Faltering Expectations
OPEC's assessment of how much of its crude the world needs this quarter has slumped on weaker demand and stronger supply
Source: Organization of Petroleum Exporting Countries
Note: The x-axis shows the month the forecast was published
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.
Second Shutdown
London traffic levels are falling, but shouldn't drop as far as they did in March
Source: Bloomberg calculations using data from TomTom Traffic Index
Note: Additional time taken for a journey that would last an hour in uncongested conditions.
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.
Dwindling Market
Persian Gulf oil producers have been hit hard by the slump in Japanese buying
Sources: Japan's Ministry of Economy Trade and Industry, tanker tracking data monitored by Bloomberg
Note: The Persian Gulf-5 are Saudi Arabia, the United Arab Emirates, Kuwait, Qatar and Iraq. Ships departing the Persian Gulf in the next few days could still reach Japan this month, potentially increasing the November number
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.
Battered
Storms have cut nearly 40 million barrels of Gulf of Mexico production since mid-August
Source: Calculations based on Bureau of Safety and Environmental Enforcement data
Note: On days when there were no reports from the BSEE, we have halved the lost production each day working both forwards and backwards from the nearest day on which a report was published. The estimated volumes account for 4% of the total lost production.
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.
With members already chafing at the restrictions, the group’s next meeting at the start of December is likely to be a tense affair.
— With assistance by Elaine He
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the editor responsible for this story:
Melissa Pozsgay at mpozsgay@bloomberg.net
