Over the past few months, there has been a lot of negativity in the global fuels market. The price war between Russia and Saudi Arabia, as well as the COVID-19 pandemic are at the top of the list when it comes to driving crude oil prices to historic lows. However, recently there has been some small and simple actions that show signs of turnaround in a positive direction in the crude market. The Texas Railroad commission, production cuts, relaxing of local travel restrictions, and construction resuming, will all have a positive influence on the oil market.
The Organization of the Petroleum Exporting Countries (OPEC) and allies agreed yesterday to cut production of crude oil by 9.7 million barrels per day (bpd) in May and June, 7.6 million bpd July – December, and 5.6 million bpd January 2021 – April 2022. The 9.7 million bpd is roughly 10% of the global supply. Reuters reports, “The cut by OPEC+ may be more than four times deeper than the previous record set in 2008 and overall oil supply may shrink by twice that with other measures, but the reduction remains dwarfed by a demand drop predicted by some forecasters to be as much as 30 million bpd in April.” It was not long ago in early January that Brent crude was trading above $70/barrel but with the relentless Coronavirus pandemic, that number dropped to a 20-year low of $21.65/barrel on March 30th.
After the recent attacks on the oil processing facilities in Saudi Arabia, demand for spot crude oil has risen. Russian oil demand has been very strong in the Asian market as a result of it. With recent U.S. sanctions on Chinese cargo ships, freight rates have spiked on tankers in the Pacific. This has prompted the Asian market to bid on freight that ship shorter distances, making the option of Russian crude oil more desirable.
Recent drone attacks have wreaked havoc on the Saudi Aramco oil facilities along with imposed sanctions on Venezuela and Iran. These events should all be pointing one direction for the crude prices…..up. Instead of the anticipated price increase, the recent fear of recession has helped keep the market in check.
President Trump recently threatened to tax, nearly $300 billion dollars of Chinese products, by 10%. The already volatile oil market, seems to have room for some extra volatility. The volatility would largely cycle around China’s response to the U.S. tariffs. If China responds by purchasing oil from Iran, analysts speculate crude could rapidly approach $30 per barrel. Trump could impose the sanctions on the Chinese imports as soon as September 1st. Trump also threatened that he could raise the tariff, if no progress has been made towards a trade deal.