THREAD #OOTT

Oil Heavyweights Look Ready for a Showdown

Oil producers could be set for another showdown before the end of the year, with heavyweights Saudi Arabia and Russia holding different views on how to approach the halting recovery in oil demand.

Renewed restrictions on travel & social gatherings across Europe, along with the tapering of state support packages for companies, are having a chilling effect on crude demand, OPEC+, who cut 9.7 M barrels/day in May, contemplate the next easing of limits on their output.

The IEA and OPEC have both resumed cutting their forecasts for this year’s oil demand. In the past two months, the IEA has trimmed its forecast by 400,000 barrels/day, while OPEC has reduced its own by 500,000 barrels. And they may have further yet to fall.

Neil Atkinson, the IEA’s Head of Oil Industry and Markets Division, said at a Bloomberg event on Thursday that the agency is “more likely to make a downgrade than an upgrade” to demand forecasts in its next monthly report.

The biggest headwind to oil demand comes from reduced trade, weakened economies and the knock-on effects of business closings and job losses, Standard Chartered analysts said in a new report. At a time when oil demand was meant to be recovering, it seems to be going into reverse

A new round of work-from-home advice and restrictions on social activities, triggered by a rise in virus infections in Europe, are set to collide with a reduction in economic support measures.

U.S. oil consumption faces similar obstacles, with government support under the Coronavirus Aid, Relief, and Economic Security Act coming to an end on September 30. Even Asia isn’t immune, with Thailand the only country that’s close to seeing a V-shaped recovery in oil demand.

Of course, it’s not all about demand. The room available for additional supply from the OPEC+ countries also depends on how much oil is coming from elsewhere. And there is at least as much uncertainty on this front as there is with demand.

There are fears — or hopes, if you’re a rival oil producer — that output from U.S. shale deposits is set for another big drop in the coming weeks and months. Well completions in the U.S. are now so low that large monthly declines in production may be imminent:

More robust monthly data from the U.S. EIA show that this year’s drop in domestic crude production has been both steeper and deeper than their preliminary weekly data suggested. Another drop in U.S. production would leave more room for the OPEC+ group to raise its own output.

But while overall compliance with the promised output cuts has been unusually good — thanks in part to the no-nonsense attitude of Saudi Arabian energy minister Prince Abdulaziz Bin Salman — a few countries are still struggling to implement their cuts in full.

Then there’s Libya, which remains outside the group’s supply deal and is creating uncertainty. The political truce in the OPEC member’s long-running civil war could allow it to boost exports, adding to global supply at an inconvenient time for the rest of the group.

The state oil company is predicting supply could quickly rise to 260,000 barrels per day from about a third. . Goldman Sachs reckons exports could reach double that by the year’s end. Vitol Group, Trafigura Group and Mercuria Energy Group don't have a united view on the outlook.

Mercuria CEO Marco Durnand says “we do not need the extra oil” that the OPEC+ group is planning to pump from January. Trafigura executives are also downbeat. But Vitol has a starkly more bullish view than its rivals.

With so much uncertainty, it’s little surprise that tensions are emerging within the OPEC+ group. Saudi Arabia wants, above all, to prevent oil prices from slipping. Its energy minister says the OPEC+ producer group will be “proactive” to stop supply from running ahead of demand

His Russian counterpart Alexander Novak is more cautious, wanting to avoid repeatedly revising a deal that sets out production targets to the end of April 2022. That agreement sees the group adding another 2 million barrels/day to their collective production from the beg of Jan

There was a similar disagreement back in March, with Russia wanting to preserve the status quo and Saudi Arabia seeking deeper output cuts, that sparked a brief production free-for-all that helped push oil prices below $20 a barrel.

END

Source: Julian Lee | Bloomberg Opinion