This winter, oil consumers and providers will not only be watching weather patterns, as they could have a bearing on demand and supply in the market, impacting both prices and stock levels. Beyond the cold, the impact of the US elections and the lockdowns from the second wave of the coronavirus (COVID-19), would take a swipe on oil prices in the days to come.
Although the weather very rarely has any influence on crude oil prices, the coronavirus pandemic notwithstanding, under colder temperature, it affects both the virus itself, in addition to driving more people indoors, thus reducing fuel demand often necessary for travel.
Indeed, oil market participants are concerned that the return of lockdowns in Europe will significantly weigh on economic recovery and fuel demand.
Already, two of the largest economies in Europe – Germany, and France, announced lockdowns, which the market was not expecting two or three weeks ago.
Industry professionals and executives did not believe that countries would resort again to nationwide lockdowns. Yet, France did, and as of Friday, people will be allowed to go out only for shopping for essential items, for medical reasons, or for an hour-long exercise. The measure will last until the end of November, French President Emmanuel Macron, said.
Germany, the biggest economy in Europe, is also restoring a form of lockdown, although a partial one, for the month of November, restricting social gatherings and closing bars and restaurants except for takeaway.
Mid-year warnings of massive storage build-ups have reaffirmed fears that the worst may not yet be over for oil prices.
Earlier, the Organization of the Petroleum Exporting Countries (OPEC), raised its global oil demand forecast for 2020 by 60,000 barrels per day (b/d) from September to 90.29 million b/d in October, as it sees an improvement in China’s demand for most oil products except for jet fuel.
“China so far appears to be the only country, globally, moving steadily on the path to recovery based on gradually improving economic indicators, particularly in industrial production, which are rising from month to month,” OPEC said in its latest monthly oil market report. “Oil demand is projected to be in line with these positive developments and trends.”
According to Reuters, oil trading firms are looking for new super tankers to use them as floating storage for diesel, as demand is expected to suffer from the renewed lockdowns in major European economies, trade and shipping.
Diesel in global floating storage is expected to increase, as major oil firms and trading houses are on the prowl for super tankers, expecting lower than usual diesel demand from the industrial, heating, and transport sector in the coming months.
Analysts at Cordros Capital and S&P Platts warned that any shock to demand would 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 traders huge discounts on Nigerian crude grades below the $10 mark, as glut and energy imbalance triggered by the coronavirus hit the industry.
Brent Crude traded lower on Monday at $38.29 per barrel at 6:05 p.m. local time, while Nigeria’s Bonny Light traded at $37.31 per barrel.
Indeed, OPEC had 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.
Oil demand may drop by “hundreds of thousands” of barrels per day from lockdowns called in recent days in Western Europe including Germany, France and England, Vitol’s Asia Head, Mike Muller, said November 1.
“I do think the impact in Western Europe is going to be hundreds of thousands of barrels a day, but we need to decide how many hundreds of thousands,” Muller told a Gulf Intelligence webinar.
As for crude prices on November 2, following the weekend announcement of England’s lockdown, he said: “We’re not going to see a violent reaction downwards in price on Monday, because I think the market could see this coming Wednesday, Thursday, and Friday already.”
Oil analysts are rethinking demand estimates with a view toward live traffic data and mobility restrictions because of the new lockdowns, Muller said.
“The dust hasn’t settled on that because people are throwing all sorts of numbers around,” he said.
One estimate that demand could fall by 1.7 million b/d in Germany and France alone is “completely overblown,” he added.
England will go into lockdown on November 5, except for schools and construction, and remain in place until December 2, UK Prime Minister, Boris Johnson, said October 31.
France, Germany and Belgium have also imposed travel restrictions in an attempt to curb a second COVID-19 wave.
Many nations had imposed lockdowns in the first COVID-19 wave, which sent Dated Brent to as low as $13.24/b in April. As a result, the 23-country OPEC+ alliance agreed to rein in nearly 10% of global crude supply, a critical step in clawing back oil prices.
Earlier, Cordros noted that 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 stated that while the one-month extension of the production cut agreement is slated to expire at the end of July, with the group signalling a desire to ease production cuts, from 9.70 mb/d to 7.70 mb/d, in August, the additional 2.0 mb/d worth of supply onto the market as demand weakens, would be sub-optimal for crude prices.
“At the same time, producers are itching to reopen the taps – 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 its OPEC+ counterparts for its historic non-compliance, made a big reduction in its output to 3.70 million b/d, a nearly five-year low. While that remains above its quota of 3.59 million b/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 1.58 million b/d, above its cap of 1.41 million b/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.
