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As China stages a massive comeback in industrial activity, super tankers have been seen rushing towards the Chinese shores, having stayed stranded looking for buyers just a couple of months ago. The international benchmark Brent crude oil price has steadied in the narrow band of $38-42 per barrel for over a month.

The US Energy Information Administration (EIA) released its monthly Short-Term Energy Outlook earlier this week, taking the market by surprise. The EIA revised the second half 2020 Brent crude outlook upwards to $41/bbl. This is 10 percent higher than the previous month forecast – and is being regarded as one of the sharpest month-on-month revision in a very long time.

The EIA forecast carries considerable weight in how the trading takes shape. Not that the EIA has not had its moments of shame – but oil price prediction has always been tricky business. More than the magnitude, it is the direction at which the likes of EIA, Goldman Sachs, Citi and other observers have been pointing. The numbers are also supported by steady decline in global stockpile.

“EIA expects high inventory levels and surplus crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase,” said the EIA in its outlook. The EIA foresees inventories going down by 3.3 million bpd in 2H 2020, and predicts the trend continuing in 2021 at 1.1 million bpd.

It was not very long ago, when the world was brimming with oil, with fast shrinking demand, and no end to inventory buildup. The expected drop in inventories must not be confused for a balancing in the market, as the supply side is still pumping much more than what the world is demanding at the moment. Even with all the compliance and extension in Opec deals – the one-third sharp sudden demand shock will take some time to return to any semblance of normalcy.

The supply side has shown immense and almost unprecedented compliance to production cuts – which has extended to over 18 months despite reservations. The unknown still remains the demand side, and while there are clear signs of demand resurgence as some of the biggest consumers reopen – the very factor that suppressed demand has shown no signs of going away. Covid has only changed locations – and still carries a tangible threat to global oil demand. In presence of such an elephant in the room, it is difficult seeing oil prices go past the narrow band they are trading at.