Oil prices may again fall into negative territory if Iraq doesn’t comply with OPEC+ deal

Iraq is OPEC's second-biggest crude producer and more than 90 per cent of the state budget, which reached $112 billion in 2019, is derived from oil revenues.

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Global oil demand has already recovered to 90 million barrels per day vis-à-vis 100 mbpd of oil demand prior to the pandemic and shutdowns.
By Prathamesh Mallya

The year 2020 will be recorded as one of the most remembered years in the history of financial markets. The host of uncertainties ranging from Brexit, negative bond yields, global trade war, oil price crash and very recently the Coronavirus; the worldwide pandemic has made this world an unbelievable place to be in.

WTI oil prices have been volatile for the first half of 2020 with highs of $71.75/bbl on (8 January 2020) to the fall below “0” followed by negative price closing on (20 April, 2020) – with an open interest of 13,044 contracts in the NYMEX Futures April Expiry contract.


In April, the storage levels across the globe were as shown in the graph alongside. The largest ever oil surplus hit the markets in April 2020, with serious concerns about how to store excess oil. Roughly 7.2 billion barrels of crude oil and crude oil products were stored onshore and on floating vessels, meaning that only 1.7 billion barrels of onshore storage were available in March 2020.

Oil


OPEC+ alliance agrees for production cut
On 12 April 2020, the OPEC+ alliance agreed for a 10 million barrel cut till June 2020 followed by 7.6 million a day until the end of the year, and then to 5.6 million through 2021 until April 2022.

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However, the big catch here is Iraq, the second higher producer in the OPEC cartel. The nation is being ravaged by Covid-19 while it attempts to keep up payments to its civil servants. It is only with funding from Saudi Arabia and a potential loan from the IMF that Iraq will be able to comply with OPEC+ production cuts.

If Iraq fails to comply, the entire OPEC+ deal may crumble. And if that happens, there are real prospects of negative oil prices returning. Iraq is OPEC's second-biggest crude producer and more than 90 per cent of the state budget, which reached $112 billion in 2019, is derived from oil revenues.

Optimism in oil markets
Lot has changed for oil markets now, when compared to the time when the global pandemic gained momentum in March 2020 and the global oil market went into a state of imbalance. The total Coronavirus cases as on 9 July 2020 stood at 12 million while the number of deaths stood at 548,000.

Oil prices have although regained its charm rising from the negative territory to the current market price of $43/bbl as on (9 July 2020) while inventory levels across the globe have been slowly and steadily reducing.

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According to Reuters, several sources from OPEC have confirmed the likelihood of 2 million barrels per day of production lift unless the demand is particularly weak. Saudi Arabia and Russia have already signalled that they are satisfied with the oil demand and the current state of prices.

Global oil demand has already recovered to 90 million barrels per day vis-à-vis 100 mbpd of oil demand prior to the pandemic and shutdowns. According to estimates from IHS Markit, 180 million barrels of oil were being stored at sea at the end of April. That has declined to just under 150 million barrels at the end of June.

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The way forward: Will WTI touch $50 barrel soon?
Steady fall in global oil inventories, opening up of the global economy, possible production lift by OPEC+ Alliance amidst the increasing global demand recovery, and increasing refinery run rates across the US and Europe in order to process the crude oil into products (gasoline & distillates), are possible green shoots of recovery for the global oil demand to stabilise.

To take this optimism further, China's official PMI picked up to a three-month high of 50.9 in June, while the private Caixin/Markit PMI reached a six-month high of 51.2, both measures comfortably above the 50-level that separates growth from contraction. PMI numbers indicate the positive moves in the base metals.

The Institute for Supply Management PMI for the United States returned to growth in June, reaching 52.6, and the Eurozone PMI got closer to growth, hitting 47.4 in June, up sharply from May's 39.4.

Although the US and China have posted good manufacturing numbers in the recent months, the pandemic continues to create havoc across the world, particularly in the United States and some South American nations. It's still far from being counted out as a factor.

Whatever the situation, possible recovery can be seen amongst the global powers, evident in the PMI numbers released and the increasing crude oil price adds feather to the hats for global recovery to gain momentum.

The assumption of continuous and sustainable recovery can go for a toss if the second wave of virus continues to haunt the global world. Till then, let higher oil prices live, and let the global GDP gain momentum.

We see WTI oil prices (CMP:$43/bbl) to move higher towards $50/bbl in a month time frame while MCX oil futures might possibly move higher towards Rs 3,500/bbl in the same time frame.

(The author is AVP Research Non Agri Commodities and Currencies, Angel Broking. Views expressed are personal.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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