The worst appears to be behind the oil market prices – key benchmarks doubled from their low levels in April. Moreover, the improvement goes beyond the futures prices and is seen in physical markets too. Is this it, and we are poised for a V-shaped recovery, or is it just the beginning of an industry-wide rebalancing?
While not getting too much attention in the mainstream media, the other day, US oil inventories surged to a record level. It suggests weaker than expected demand from the largest economy and highlights there are plenty of challenges ahead until a sustained recovery.
2020 Oil Industry Challenges Ahead
The road to the end of the year is full of challenges for the oil industry. To start with, the market is expected to shift from surplus to deficit in the second half of the year. It implies that the price to further oil recovery will not be a straight line, but an uncertain process, filled with wild swings.
The recent bounce put pressure on refiners margins too. Refiners must change their business economics as the coronavirus pandemic exposed the gasoline and naphtha markets’ weaknesses.
To continue, the Chinese economic recovery plays a crucial role in the global oil demand’s mathematics. As it was the first country to suffer from the coronavirus, it is also the first one that reopened its economy.
Middle-East oil production and deliveries offer a good benchmark as to how the economic recovery in China is doing. Around 80% of Oman’s physical cargoes have China as their destination, so investors willing to speculate on the Chinese economic recovery have a benchmark to look after.
Finally, there’s OPEC. The future direction of its policy is enough to swing the oil market one way or another.
Whenever there is an industry struggling, new trends emerge. Players, big or small, find new ways to do business, leading to further disruption for the ones failing to adapt. For instance, Iraq crude exports to China increased in the last three months – if the trend persists throughout the rest of the year, it will give more incentives to the ones arguing for the growing Asian pricing power (especially Chinese).
In the end, this is an industry dominated by supply and demand. Throughout history, we have seen price wars between oil producers, but all in the context of steady demand.
Until demand steadies, the price of oil is likely to fluctuate further – any rebalancing process, therefore, will be full of surprises.