The petroleum complex retested the highs of early June, reaching 40.60 basis August before retracing the bulk of the gains. The early strength appeared to be linked to ideas that the easing of lock downs in many areas will help lead to a resurgence in economic activity which will support demand. The conclusion of OPEC’s Joint Ministerial Meeting also appeared to provide support despite the failure to extend the current cuts past July. Instead reports that Iraq and Kazakhstan had prepared proposals compensating for overproduction in May helped alleviate concern that OPEC’s compliance with the production cuts had fallen short at 87 percent. The Price Monitoring Committee left open the door for extending or easing the record production cuts until after July, following their next meeting. The current production cuts are tentatively planned to be scaled back from the current level of 9.7 mb/d to 7.7. How the increases in production will be allocated with consideration of current levels of compliance will be a main discussion point over the next month.
Prior to the meeting yesterday, OPEC in their monthly oil report forecast world oil demand will decline by 6.4 mb/d in the 2nd half of 2020 compared to a decline of 11.9 mb/d in the first half. Although the reduction in production by OPEC+ has provided the basis for a stabilization to values, the ability of OPEC to maintain production restraint past July will be considered in assessing price prospects and how quickly excess inventories are drawn down. Of concern remains economic growth with large declines expected in many economies. Full year economic growth is expected to decline by 3.4 percent globally, but considerable risks to the outlook persist linked to the progression of the pandemic, growth in debt and political disputes including Brexit, the Sino-US trade dispute, and mounting social instability.
With economic growth expected to decline, the pressure on petroleum demand is likely to be pronounced given the sharp contraction apparent in the hospitality and transportation sectors. Although the injection of liquidity by Central Banks has helped avert a deeper crisis, the ability to support the market will be inextricably linked to the ability of OPEC to control production and balance inventories. Although the market’s ability to advance following the Price Monitoring Committee meeting without any additional action seems to suggest that current price levels are sustainable. We remain unconvinced given what looks to be a stalling out of US cuts in production, which in turn could prompt action on the part of OPEC to preserve market share. Subsequently we offer the likelihood that today’s high of 40.60 basis August could represent an intermediate top for the crude oil market.
The second half of the week has seen a recovery in prices as the market benefitted from some "not so bad" news, with the active August settling up 2 cents at 1.748 today. Weather continues to warm as the two week forecasts upgraded CDD expectations, while LNG exports have steadied, albeit at low levels, as the market awaits news on August loadings. Yesterday's storage report indicated an 85 bcf build, in line with estimates and slightly below average. Background support emanated from higher equity and petroleum prices as they garnered buying interest on improving signs for China trade relations and economic improvements from the lifting of lockdowns. The Baker Hughes numbers today also lent support with the overall count down 13, with gas rigs down 3. With expectations beginning to suggest that this summer's power burn could surprise on the upside, we continue to look for prices to perform better as the summer progresses. The 1.80 level looks likely near term on follow-through, with 1.90 the next target if the market can break out of the downtrend channel from the late May highs.
Charts Courtesy of DTN Prophet X
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