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How is the rest of 2020 shaping up for crude oil?

August 14, 2020

crude oil

The second quarter was bad for oil companies. Industry giants like Exxon, Chevron, B.P, and Shell announced losses amounting to billions of dollars. Even the mighty Saudi Aramco, the most profitable oil company in the world, reported a whopping 73% fall in profits compared to the same quarter last year.

This was all foreseen since Saudi Arabia’s overproduction strategy in April sent oil supply soaring while lowering oil prices, and coupled with world-wide economic lockdowns in response to the coronavirus pandemic, coupled with a heavily damaged aviation industry caused an absolute decimation of oil demand.

So with Aramco now resuming full production and lockdowns across the Globe being lifted, the question on everyone’s lips is how much can oil prices recover? And how much better can oil companies improve for the remainder of 2020?

Aramco gave a very upbeat view for the second half of the year in its earnings call on Monday. According to CEO Amin Nasser, the energy giant is relying on an increase in demand in Asia to help it recover profits in H2. Overall, this seems like a good strategy. China, for instance, saw its greatest drop in oil demand at the beginning of 2020 and was already starting to recover in March and April, when Europe and North America’s oil demand hit its lowest point.

A huge amount of Saudi Aramco’s crude oil sales head to Asia (roughly 75%) so the company is looking to benefit more from rising Asian oil demand. BUT, there is a major issue with this outlook.

Oil is a global commodity, and Asian demand alone is not going to be the most important factor in setting the global oil price. Even with demand from China rising over the past few months, oil prices have stayed incredibly stable, moving only slightly within the $40-$45 range, over the past two and a half months.

The U.S is the Biggest oil consumer and the largest economic power in the world, so economic and oil demand news from the U.S. tend to play a larger role in setting global oil prices than information about Chinese demand or the Chinese economic growth does. If the market price doesn’t rise, Aramco will have difficulty raising its OSPs.

crude oil

Also, Aramco is hamstrung by Saudi Arabia’s commitment to OPEC+ production cuts. Aramco’s cost of production is so cheap that even when the price of oil is down, it’s able to lift its profit by piling more oil to Asia. China, in particular, has rushed to purchase more oil for storage when the price is low. However, because Saudi Arabia is committed to keeping its oil production at 9 million bpd, Aramco can’t increase its sales to China unless it draws down its own inventories.

Demand outlook in the United States and throughout Europe remains up and down, with some indications that it’s gaining strength, but the growth is modest. Refinery utilization across the United States improved last week to 80% (though this number can be attributed partially to a change in the set of refineries included) and crude oil inventories declined by 4.5 million barrels. However, total motor gasoline inventories increased by 700,000 barrels last week. Crude oil, gasoline and diesel inventories all remain well above average for this time of year.

Great Britain reported that it has fallen into its deepest recession of any global economy. Even with governments no longer stifling economic activity, the recession caused by these policies will continue to negatively impact oil demand and likely keep prices depressed despite activity in Asia.

In Summary

Slowing production was not enough to raise prices above the $40-$45 range. Other than a supply catastrophe, there will need to be some exceptional demand news to see a significant rise in prices. However, the largest consumers of crude are just starting to come to terms with their economic conditions, and have yet to overcome fears of the virus, so it is hard to see demand growth in the immediate future.

Oil companies should do better in H2 because March and April were terribly bad months. However, without higher prices and without the demand to sell markedly more oil, the coming months look bleak for investors.

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