Although oil demand and supply risks continue putting downward pressure with a negative oil market outlook, the latest study of the Oxford Institute for Energy Studies (OIES) projects a sustained, oil price recovery in the short-term.
The sharp price rebound in May and June saw daily Brent return to over $40 a barrel on June 5 from $19 a barrel on April 21. Prices remained surprisingly steady at $40 a barrel and $45 a barrel in July and August, but September recorded a break in this upward trend with prices falling for the first time since June for a few days below $40 a barrel, the report said.
This was attributed to a blend of bearish factors on both the supply and the demand side.
Amid speculation about peak oil demand, some experts maintained that oil demand has already peaked. However, concerns over a second wave of the coronavirus pandemic have led many to downgrade their demand estimates, while China's crude imports, which have been a crucial balancing mechanism, have begun to ease.
The report stressed that Brent remains well supported at the mid $40-45 a barrel range despite output escalating from non-OPEC production in North America and United Arab Emirates’ over-production in August and September, which raised concerns over compliance levels of OPEC+ producers to the agreed oil cut pact.
“The recovery in oil demand has moved to a lower gear and is extremely uneven in terms of geography and prices,” the report said, adding that the refining margins will continue to be formed by this inconsistency.
Since oil demand recovery to pre-crisis levels is widely believed to take longer than expected, the report said the supply side's role in supporting oil prices is becoming even more important.
“High OPEC+ compliance has been a key feature in the current cycle and compliance will remain key throughout the entire duration of the agreement,” the report stressed while also highlighting the significance of the compensation mechanism for overproduction.
The report underscored “a slow and lengthy phase” in the US shale recovery due to the unprecedented fall in drilling activity, barriers to external finance and cash flow pressures.
“Putting these different moving parts into our model, the short-term price outlook sees the oil recovery persisting although the demand/supply risks to the outlook remain tilted to the downside,” it added.
By Sibel Morrow