The oil-price rebound has stalled

Are we heading for another oil-price slump? Benchmark Brent crude futures plunged to an 18-year low of around $19 a barrel in April, while US oil futures briefly went negative. Prices have since climbed out of the lockdown hole, with Brent trading around $45 a barrel over the summer. Yet the rally has now stalled, with prices down by 6% since 1 September to about $42.50 a barrel.

Global demand for oil is wobbly. A second wave of Covid-19 will see more people working from home, while lapsing government support programmes make for a shakier outlook for consumption and global trade. Global crude oil demand was roughly 100 million barrels per day (mbpd) in 2019, but is likely to be closer to 90 mbpd this year, according to forecasts by oil-exporters’ cartel Opec. In Japan, the world’s fourth-biggest crude importer, imports fell by more than 25% on the year in August, says Bozorgmehr Sharafedin in Reuters.

Bulls are looking to the supply side. The price crash has battered US shale oil, says Myles McCormick in the Financial Times. Upstream energy firms with a combined $85bn of debt have filed for bankruptcy protection over the last eight months. Many investors are “fed up” with the unprofitable sector and won’t bankroll further losses. US oil output peaked at 13 mbpd at the start of this year, but is currently below 11 mbpd says the Energy Information Administration.

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Oil-Price War Two?

Yet reduced output will only gradually make a dent in the world’s swollen stockpiles. Countries such as China used the April price crash as an opportunity to fill up the national tank at a bargain price. Global inventories remain above historic levels and “spare capacity” in the supply chain is “at the highest levels in 25 years”, says Steve Goldstein in Barron’s.

April’s oil-price crash was triggered by a Saudi-Russian “price war”. Unable to agree on how to manage slumping demand amid the first wave of lockdowns, the two sides resorted to flooding the market with crude in an all-out effort to win market share.

After the price war, however, Opec+, a grouping led by Saudi Arabia and Russia, got its act together, cutting collective output by 9.7 mbpd in April compared with 2018 output levels. That move stabilised the market. Those cuts are being reduced, but still stand at 7.7 mbpd. Could we be in for a repeat performance? Riyadh and Moscow are split over how to manage the latest demand hit, says Julian Lee on Bloomberg. Russia prefers to wait and see, but the Saudis have called for a more “proactive and preemptive” approach that favours new cuts to keep prices buoyant. This is all strikingly similar to what happened in March. Don’t rule out “another showdown before the end of the year”.