There are signs everywhere that the oil market reached an inflection point. In addition to full-scale oil production cuts by oil-producing countries, China’s rising oil demand stabilizing oil futures prices and easing oil tanker rents are raising expectations of normalizing oil supply and demand. However, the saturation of oil storage is still expected to affect the fluctuations in international oil prices.
According to the reports, the oil market is estimated to have entered an inflection point, saying that international oil prices have risen around $ 5 a barrel in the past week on the first day (local time).
The simultaneous decrease in supply and the increase in demand is considered as a background to gradually relieve the severe supply and demand imbalance in the oil market.
First of all, the supply is decreasing. A reduction of 9.8 million barrels per day, agreed by the Organization of Petroleum Exporting Countries (OPEC) and Russia, takes effect from today on wards, and the production of the United States and Norway continues. Norway has declared its own production cuts, and oil production in North America, including the United States, Canada, and Mexico, is also declining. Although the amount of production was not explicitly proposed, it was analyzed that 3 million barrels per day had already disappeared from the market following the oil well closure following the collapse of oil prices.
Dana Grams, chief executive officer of Converge Midstream, which operates an oil storage facility near Houston, Texas, said, “The amount of oil flowing through the pipeline is decreasing.” Permian Basin, the largest shale oil production area in the United States, and Texas Petroleum production in southern states, including Eagleford, has declined sharply.
“Although it took some time, the reduction in oil production is progressing faster and deeper than expected,” said Beck Lukok, co-director of Trafigura, one of the world’s largest independent oil traders. “Although there is still a considerable distance from sound market supply and demand, the oil storage crisis seems to have already peaked,” said Lukok.
China’s demand for oil began to increase amid a decline in supply. As China, the first to suffer from Covid-19, began to start its economic activities, oil demand increased and low oil prices were used to expand strategic reserves.
It is also worth noting that as the oil price is adjusted, the situation in the normal market (contango), where oil futures prices exceed spot prices, is weakening. The difference between Brent oil spot prices and six-month futures prices has plummeted by half since the end of March, narrowing to less than $ 7 a barrel.
Signs of improving markets are also seen in the plunge of oil tanker rents for oil storage. VLCC’s daily rental of the largest tanker, which can ship up to 2 million barrels, soared to $ 230,000 at the end of March, but the rent began to fall, and last week it was halfway at $ 8,8600 a day.
Energy consulting firm Restad Energy estimates that supply and demand problems are alleviated as the United States and European countries ease containment, but oil storage concerns will continue for weeks to come.
According to Restad, 28 tankers departing Saudi Arabia with 43 million barrels before subtraction agreements will enter the United States by the 24th.
“The oil market is not a magical recovery,” said Restad analyst Lewis Dixon. “The storage problem is still a serious issue. Oil companies have to pay a high price, but they must make the necessary production cuts and breathe the market,” Dickson said.
Core Capital’s Consultant Faisal J A Malik from Seoul Korea said the recovery in oil demand is “very slow to progress, while some oil companies will produce oil at market levels that could not survive in the long run”.