Oil prices – much depend on demand

During such tumultuous times, a decline in oil price volatility for the last three months should make headlines. Brent crude oil prices have remained in the range $40-45 per barrel from early June till August end, averaging at $42 a barrel. WTI crude oil has seen an even smaller range – oscillating between $40-$42 a barrel during the three months.

Lift to the prices since their crash in the first quarter of 2020 has come from OPEC’s compliance rate, China’s early recovery from the pandemic and the resultant increase in demand and opening up of countries hard hit by the pandemic. Does that mean that the worst is over for the oil market?

For one, this can never be said for the fickle oil market. And secondly, expectations and analyses are rather pointing in the opposite direction. Even the global oil agencies such as IEA joined the chorus of those that have been heralding slowdown in the global oil demand recovery.

There are a number of factors for the anticipations; the most important is the China-effect. More than genuine demand, there has been abnormal activity by the biggest consumer of oil; the recovery in demand that has been witnessed has come from China’s import spree amid low crude oil price. That is likely to slow down as it is adequately replenished for some time now.

Then the bearish sentiments and expectations are hinged to weak refining margins as well as no respite for jet fuel demand. Travel and airline industry are not expected to bounce back to pre-Covid levels anytime soon, which has put a heavy lid on jet fuel consumption.

Also, the global economic recovery is nowhere in close sight. While the world might not be headed for a major slowdown as lockdowns have been lifted, the threat from Covid-19 is not over. From extended first wave in big economies such as the US and India to the fear of second wave, reasons for demand destruction still exist. Saudi Arabia cutting its official selling prices for crude oil is the latest sign that demand recovery is stumbling. From here, there are more signs of a price slip than a lift.