By Cyril Widdershoven
The American Petroleum Institute (API) report yesterday evening a 6.83 million-barrels draw in crude oil inventories for the week ending July 24, in stark contrast to market expectations of a 450, 000-barrel rise. The verdict however is still out, as today more definitive US stocks data is due for release by the Energy Information Administration (EIA), the oil advisory of the US Department of Energy. Financials are again supporting the mantra that they see crude oil prices paring gains with continued growth concerns capping further upsides at current levels.
Still, as IG market strategist Pan Jingyi stated, “the surprise draw in crude oil inventories according to the API report had played a part in supporting prices overnight, though WTI can be seen staying relatively more cautious with a buildup in official EIA crude inventory expected on Wednesday”. Axicorp’s chief global analyst Stephen Innes is even more optimistic, expecting that “the enormity of the inventory draw should be sufficient to hold the bears at bay and temporarily alleviate some concerns about ongoing demand distress”.
Still, even that bulls are making headlines, the bears are just quietly waiting for their chance to surprise. The latter is based on the growing concerns about COVID-19 2nd waves in major consumer markets, not only in USA, but increasingly in the EU and UK markets. An unexpected growth is being reported of Corona infections, leading to a long list of regions in the OECD being put on Orange (only necessary travel) or even in lockdown again. Asian countries, especially India and Japan are also looking at the abyss.
For the demand of oil, the current re-emergence of lockdowns and renewed travel restrictions will have a direct impact on pure speculative optimism of demand growth. The summer season, known to be the US driving season with high transport fuel demand, is also in Europe a major market. Lower tourism, especially by plane or cars, will put demand levels back to way below average. At the same time, tourism spending in Mediterranean countries or France and Germany will be hit, putting current fragile economic growth (from Corona-levels) at risk of already on ice.
By looking at the surprise positive figures reported by China and some minor other countries can not or shouldn’t deflect attention for a possible 2nd wave of Corona and a still looming unemployment wave of unknown proportions. Demand is currently artificially pushed up by stimulus packages, while financial facts on the ground are extremely black. The long list of lay-offs in Europe and bankruptcies is staggering. In the coming months, most national stimulus packages in Europe will end, some literally after the summer season. A possible Indian summer scenario for economic figures is clearly visible but people seem to be only charmed by the red and orange coloring.
The optimism about the widely published EU Corona Fund packages, set at EUR750 billion, is also based on shaky grounds. Not only is the implementation still an issue, as the European Parliament is now having the ball in its corner, but possible recipients (Italy, Spain, Greece) have not even yet a strategy proposal how to use the available funding. The current situation looks to be a hot air balloon, that without structural economic changes in the Southern European Area no funds are going to be disbursed at all.
Still, oil producers, such as OPEC or US shale producers, are seeing light at the end of the tunnel. Reports are tumbling over each other showing demand increases to continue, and a supply-demand crisis appearing. Increased production by OPEC and others however more likely will result in a renewed oil glut in the market for H2 2020. Officially, global crude output is set to increase next month as OPEC+ sticks with its schedule of tapering coordinated production cuts from 9.7 million b/d to 7.7 million b/d from August 1.
The next couple of the oil market could be in a shock again. Norway’s Equinor will report second-quarter earnings on Friday, with Austria’s OMV, Italy’s Eni, France’s Total and Anglo-Dutch company Shell set to report next week. The U.K.’s BP will unveil their quarterly results on August 4. US oils also will report. ConocoPhillips will report earnings on July 30, with Exxon Mobil and Chevron expected to follow on July 31.
The current oil market’s positive vibes will most probably be crushed and mangled by historically red financial figures. The reaction could be violent if realism gets back to the market. The world’s largest oil, Saudi Aramco, is expected to also report its financials on August 9. No relief however is even to be expected from the King of Oil, as Aramco’s revenues and profit margins are also hit very hard.
If no miracle happens, the oil market is in for a negative run for the next 5-6 months. If US shale and OPEC+ compliance is also lowered, aka production increases, more oil will be hitting the market than financial analysts and hedge-funds are taking into account. Supply-demand is not yet in an equilibrium, while external indicators are negative. IOC financial reporting the next days will give an indication of the last couple of months, but should also be assessed as a pre-cursor for more pain. If big oil fails to be showing positive figures, leading to investment cuts, smaller ones, even oil producing countries, could be hitting a rock very soon. Lower oil prices due to increased production is not what the future needs.