Oil is back to early June levels. In the process, the last week saw the biggest weekly drop since April’s historic fall. Things are surly nowhere near as bad as they were in April, but any signs of early recovery or stability have been put to rest, for now, and the focus now turns back to Opec once again. The oil cartel’s meeting is scheduled for this week, and analysts expect the outcome of the meeting to have a bigger bearing on the oil prices than the last three months.
That is not because Opec Plus has suddenly become more powerful overnight – it is more because oil has failed to stage a demand comeback that was earlier anticipated, as the Covid-19 cases had started to dip across Europe and Asia Pacific. The pandemic, it seems, is not going anywhere in Americas, and the Western Europe has just started to witness what increasingly looks like a second wave. This has shaved off a few dollars off the barrel value in the last two weeks.
The World Health Organization (WHO) has also issued fresh warning signs indicating that situation in Europe would be ‘tougher’ in October and November. Not that Europe has ever directly been the demand engine in the last two decades, but the slowdown in Europe does trickle down to the oil consumption leaders, who are suppliers to most of Europe.
On the supply front, Opec Plus had done extremely well to maintain a near flawless record in terms of production cut compliance, with a little mishap here or there. By and large, the production cut was followed religiously, before being relaxed late last month. Reports are now emerging that Opec’s third largest producer, the United Arab Emirates, has breached its production quota for last month by a significant margin.
The market expects no drastic measures to be announced in the upcoming Opec Plus meeting, as the supply situation has not significantly worsened from three months ago, even with a few compliance targets missed. But a strong and clear indication cannot entirely be ruled out, which could possibly lead to an automatic production cut to be effective, should the price rally continue south, or the inventories rise from the current levels.
The rebalancing in oil still seems distant. Key Opec players outside of Saudi Arabia and Russia may not be overly sold on the idea of fresh production cuts, as most are facing financial distress, and may want a certain price to find a semblance of budget balancing, already faced with the adversities of the Coronavirus. Pakistan, meanwhile, would not mind the trend to persist, as this could present another opportunity to keep the imports low, and still levy more taxes on petroleum products without increasing prices.