Published: October 24th, 2020
The American Petroleum Institute (API)’s announcement of a surprise build-up in American crude oil reserves pushed oil futures southward this week, particularly in Asian markets. The news added to mounting oversupply worries as the return of production in Libya and fears of weakening fuel demand from the COVID-19 second wave continues to dampen investor sentiment.
At midweek WTI futures were down 0.54 per cent, and Brent oil futures dropped 0.64 per cent. Although both futures reversed gains made in the previous session, Brent and WTI managed to stay above the $40 mark.
In the week up to 16 October API reported a 583,000-barrel build against the forecast 1.8-million-barrel draw and the previous week’s draw of 5.323 million. Investors will watch for new data from the American Energy Information Administration, which is due at the end of October.
Analysts at Rakuten Securities told Bloomberg that rising US inventory is driving concerns about oversupply while worries about a second wave of COVID-19 cases is increasing worldwide. If new lockdown measures are widespread, it threatens to stifle full recovery in fuel demand.
Demand continues to soften as some European countries re-start implementation of business and travel restrictions, and even full lockdown measures, to flatten the uptick in COVID-19 cases across the continent.
Plans by OPEC to ease production cuts in January, combined with weak demand, are also aggravating worries about crude oil oversupply. The re-entry of Libya to global crude oil production threatens to glut an over-saturated market. Even though Libya is an OPEC member, its recent troubles have meant it has an exemption from productions cuts.
Not everyone agrees that’s a good thing. Russia’s energy minister warned this week that it was premature to talk about global oil production reductions for the new year.
Passage of the latest stimulus measures in the US this week could give demand a boost, but it’s too soon to measure the impact on sentiment or consumption. Hopes for economic recovery in the United States and elsewhere could cap investor losses, but the proposed reduction in planned output cuts by OPEC could limit any future gains.
On Thursday Crude oil prices picked up a bit on New York futures markets after reassuringly robust US economic data. US crude futures were up again 1.4% on Friday, though prices stood essentially range-bound at week’s end, however, as reports of a rise in gasoline stockpiles firmed up worries about softening fuel and energy demand.
The EIA reported a rise of close to two million barrels in gasoline stocks, defying expectations of a draw of roughly the same size. The amount of petrol being supplied to the US domestic market is down 9% on the five-year average. Demand for jet fuel has cratered, with supplies more than 38% under the five-year average.
The figures suggest that the fresh wave of Covid-19 infections, which is hitting the Midwest region hard, is killing consumer confidence and eating into non-essential travel.
Prices remain under pressure from Libyan production estimated to above 500,000 barrels a day. Continuing signals that the global economy is weakening again under Covid-19’s second wave are also keeping oil bears busy.
There were a couple of more promising economic signals when initial jobless claims fell much more sharply than expected, and existing home sales rose to the highest monthly level seen since 2006.
News from the oil and gas sector was more mixed, with Bloomberg reporting that Exxon Mobil had warned staff on Wednesday that unspecified job cuts would be happening soon. Other analysts said they thought the downward cycle was still some months away from reaching a turning point, though some believe Brent levels could return to $50 by the second half of next year. That’s the point when vaccines are expected to be in circulation around the world.
The Chinese state oil giant, CNOOC, which is focused on offshore and overseas production, reported a 27-per cent drop in revenues for the third quarter, as low oil prices took their toll.
Despite CNOOC’s oil production growth during the reporting period, the crude oil price war kicked off by disagreements between Saudi Arabia and Russia in early spring, and the effects of COVID-19 on oil demand had a significant impact on sales.
CNOOC has had to reckon with oil prices averaging just $43 a barrel in Q3, the company said in a regulatory filing, even as production rose by 30 per cent to 132 million barrels. Domestic production, in particular, grew by a notable 11 per cent. The uptick, however, wasn’t enough to positively affect overall revenues.
While it increased domestic Chinese production after Beijing’s call for all state oil majors to increase China’s energy independence, CNOOC was forced to reduce overseas output in response to market changes. Oil production from the company’s overseas assets fell by 4.5 per cent in the third quarter.
Like all major oil companies, CNOOC announced spending cuts earlier this year when the pandemic started to affect oil demand. It said it would select investment opportunities with greater scrutiny given the new price environment.
‘As the pandemic increases global economic uncertainty and oil prices fall, CNOOC will implement more prudent investment decisions and more stringent cost controls,” the company said in March.
Despite attempts to raise domestic oil production, China has had to remain dependent on crude oil imports for most of the oil it uses. In fact, Chinese oil imports have been credited with driving what little recovery there has been in world oil prices since April. While reduced production from OPEC went some way towards calming investors, it was China’s buyers, stocking up on cheap oil, that drove the spikes.