BAKU, Azerbaijan, Sept.17
By Leman Zeynalova – Trend:
After two months of tightly rangebound, sideways trading across July and August, oil prices have taken a tumble in September, Trend reports with reference to Fitch Solutions.
“While this is at least in part due to broader market selloffs, it is also testament to generally weak sentiment towards oil. Positioning in Brent futures has grown steadily more bearish since August and is currently approaching the levels last seen during the market crash over March to April. Such sentiment leaves prices heavily exposed to any signs of fundamental weakness. In light of this, a spate of disappointing economic data and signs of resurgence of Covid-19 in key markets (including parts of the EU, Japan and India) have damaged price action in Brent, with scope for further downside, should conditions continue to deteriorate.
“While the underlying fundamentals should continue to improve over the coming quarters, we expect to see a ‘stop-start’ recovery in prices. Despite recent wobbles in the market, our economists note that leading indicators point to continued improvements in the global economy, while the policy backdrop remains supportive of growth. Meanwhile, more favourable base effects should flatter growth next year. Nevertheless, their belief remains that the road to recovery will remain bumpy and uneven, as countries tackle the virus with varying success. Given that many of the major emerging market consumers are among those countries that are struggling most to contain the spread, this is problematic for oil. More broadly, the ebb and flow and coronavirus containment measures will likely feed through into bouts of acceleration and deceleration of demand growth, which will - at the least - affect the pace of the market's rebalancing and, at an extreme, could tip the balance between deficit and surplus.
“A blinkered focus on the demand side is deflecting attention from substantial risks on the supply side and we see increasing scope for a market shock in 2021. Overwhelmingly, we see price action being led by developments on the demand side and broader shifts in sentiment related to Covid-19. However, the risks on the supply side are significant and growing. Between the OPEC+ production cut deal and supply outages in Libya and Iran, around 10.0mn b/d of supply (c. 10.0% of global production) is being held artificially out of the market. The bulk of this could feasibly be returned over a period of months.
“In Libya, c.1.0mn b/d of supply has been shut in, as result of the ongoing conflict between rival factions to the east and west of the country. A recent pledge by Khalifa Haftar - leader of the Libyan National Army - to reopen the blockaded ports could see this supply return over the coming months. While the market has grown relatively insensitive to (highly volatile) Libyan output, the growth in production could derail the global rebalancing of supply and demand, at least over the short run. Further to this, Joe Biden's pledge to re-engage with Iran could see around 2.5mn b/d of supply returned to market over 2021, should President Trump lose the upcoming election and Iran move rapidly back into compliance with the nuclear accord. This is turn raises question marks over the fate of the OPEC+ production cut agreement. Cohesion is anyway likely to fray, the longer the deal remains in place. But strong growth in markets outside of the group will likely accelerate this process and substantially weakens the prospects for any deepening or extension of the existing cuts, in response to renewed weakness in demand,” reads the analysis released by Fitch Solutions.
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