July 15, OPEC and non-aligned to it countries, led by Russia has agreed that from August this year to reduce the total amount of reduction in production by oil from the current 9.6 million barrels a day to 7.7 million. Thus, kept from April 9 commitment to reduce oil production has made an unexpected somersault in the direction of increasing its production. What caused this reversal?
First, timid signs of growth in oil prices.
The initial decline in production at 9.6 million barrels per day was effective from 1 may to end of June this year. After that, the decline gradually had to be reduced to 7.7 million barrels at the end of this year and to 5.8 million in the period from January 2021 to the end of April 2022.
As you know, at the June videoconference Ministerial monitoring Committee of OPEC+ (JMMC) it was agreed to extend the reduction of production at 9.6 million barrels until the end of July, since the Committee felt that global demand for oil recovered is insufficient. At this meeting the main members of the group OPEC+ Saudi Arabia and Russia, as expected, the agreement was supported. The rest of the Union members followed them.
The Minister of energy of Saudi Arabia Abdul Aziz bin Salman then said: “In the last few weeks, felt some restoration of activity in the global oil market after a sharp drop in connection with the closure of cities and the decline in international air travel due to pandemic coronavirus, but it is not enough to mitigate the limitations.” Saudi Arabia and Russia has demanded from Iraq, Nigeria and Kazakhstan, were not exactly of the agreements, unilateral “reset” admitted exceeding agreed production volumes during August and September. However, until now there remain serious doubts that these countries-violators will comply with these requirements.
Moreover, if there would have been weakened restrictions on oil production, and the OPEC member countries could also be tempted to avoid exceeding established quotas.
Now the situation is, according to OPEC+ has changed. And on the oil market can get the additional 1.9 million barrels of oil a day. It cannot be excluded that, given the current moment, they can seriously affect the dynamics of oil prices.
In the U.S., there is a second wave of coronavirus that affects industrialized southern States. The demand for oil in America continues to show a trend towards weakening. According to data published by the U.S. Department of energy on 15 July, the weekly reduction of commercial stocks of oil and oil products in America totaled 9,276 million barrels and was the highest over the last 9 weeks. Demand for petroleum products in the United States is 18.48 million barrels per day, which is 10% below the average for the last 5 years. It is, however, a slight improvement compared to the first half of April, when the same demand was only half of the annual average. Gasoline consumption decreased by 10%, and jet fuel — 26%. Noteworthy is the low loading refineries — 78,1% (however, in the first half of may she was at 60%). In the United States is only observed during a natural disaster type storms and floods.
Summer and the associated active automobile season to the relief of the US oil industry has brought. The sharp drop in fuel demand lead to the fact that refineries are working “in the void”, at a loss. Unlike the analysts, the refineries are the first to detect adverse conditions in the sluggish orders, gas stations and other sales points. In this regard, they reduce their power, not expecting in the short term recovery of normal demand. Experts claim that the level identified in the pandemic, even in the case of deviations of the coronavirus to previous levels quickly return.
The experts ‘ attention is attracted by another important circumstance. Oil production in the US fell in the period up to may much more than expected in the month of June never properly recovered. Futures prices for WTI below $ 40 not allow shale companies to rely on the income.
Although the securities market in the United States and is experiencing some recovery, growth in oil prices is unlikely. In the oil futures in recent years an increasing speculative, due in large part to artificial causes — excess liquidity as a result of the Federal reserve system of the so-called “quantitative easing”, i.e. the release into circulation of a huge amount of money. They artificially warm up the oil market.
The real world market of oil and oil products is not recovered. Witnessing the growing gap between the real economy and the speculative market of securities. Complexity adds not staying in the world, and primarily in the United States, the pandemic coronavirus. Falling private consumption in households.
All of this raises insurmountable obstacles to the recovery of the us and world economy.
As soon as the fall may be a correction in the securities market in the direction of convergence with real commodity markets cannot be ruled out, albeit temporary, “reverse reversal” in oil prices towards the level of about $ 20 per barrel. And it won’t be a big surprise to us.
Eiki Matsumoto was born in 1963 in Osaka. Graduated from the Economics faculty of Osaka University. Since 1991 lives in USA. For a long time worked as a trader on the new York and Chicago commodity exchanges, mainly by hydrocarbons. In 2006 he founded his own brokerage company Yosoukai Global Investors, Inc. Regularly prepares orders analytical reports. Frequently in the press and on seminars related trends on the world commodity and exchange markets.
Comments Japanese readers
For us, the Japanese, sitting fully on imported oil, the decline in world prices would be a holiday! No we have no business to these producers!
So oil is not so expensive. It is our government winds her crazy taxes! Red price of gasoline now 80-100 yen per 1 liter. And the government and the oligarchs to tear up almost twice as expensive!
Energy cannot depend on the same oil. Postcoronary the world should Wake up and vigorously develop new energy sources.
Due to the coronavirus, I have so much money saved this year on gasoline and toll roads! It would always!
And America is gradually blown away! It is not so powerful. People are not fooled! How do you make the poor and unemployed to roll out on the American Hiway? Here and work they have refineries half-heartedly. When it is a cheap petrol!
It is necessary to change on “Tesla.” Yes she looks very affordable. Again, needs electricity. And it’s the same money. In General, where throw, the common man all the wedges!
In Japan the government does is to Rob the people with taxes to the bone!
You need to prepare for that pandemic coronavirus is still very long we will halloo to one another in terms of oil prices.
Reducing consumption will bankrupt America. After all, oil wells cannot be turned off. Even if the oil is not sold to produce it the Americans will have a loss!
Good idea about the speculative component in all of these oil futures and the role of the Federal reserve system of the United States in her opening act!