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Oil remains stable (for now) despite high uncertainty in the horizon

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Since the negative rates of April, the oil market has partly recovered and settled around $40. The ongoing high uncertainty over demand, along with the changes in production in non-OPEC and OPEC countries, haven’t moved oil from its $40 mark over recent weeks. What’s next for oil?  

Oil demand is expected to rise in 2021, according to the OPEC and the Energy Information Administration or EIA recent reports. However, these outlooks don’t project a full recovery of global demand to the 2019 levels. OPEC expects oil demand to rise by only 7 million bb/day, whereas the demand is expected to drop by 8.9 mb/d so that the recovery will be short of 1.9 mb/d to reach the levels recorded back in 2019. The EIA expects 2021’s demand to be 1.2 mb/d below 2019’s levels or 1.1% — not an optimistic outlook. And even with this lukewarm outlook, oil prices remain anchored around $40.

From the supply side, the situation isn’t much better. The EIA expects oil output to reach 97.1 mb/d – still below total demand — and 0.7% lower than in 2019. However, in 2021 the EIA projects output to rise by 1.65 mb/d or by 1.7%, year over year. OPEC is more conservative and expects non-OPEC output to rise by 0.92 mb/d. These projections could be revised up in the coming months, as OPEC+ is set to raise their output and thus lift oil inventories, and exacerbate the supply glut.

Although changes in output could play a significant role in moving oil prices, the main driver will remain the changes in demand expectations. The surge in COVID-19 cases in the U.S. could hinder demand growth and even reverse the economic recoveries from May and June. Even in certain countries in Asia, such as Japan, the rise in Covid-19 cases has led the country to reimpose lockdown restrictions. These developments could impede the economic recovery and reduce further the demand outlook — and thus also pressure down oil prices.  

Conversely, the recent weakness in the U.S. dollar could provide backwind for oil prices. As Covid-19 cases rise in the U.S., and as the Federal Reserve remains accommodating all awhile hinting it could provide more stimulus if needed, the U.S. dollar could weaken further – leading to more upward pressure in oil prices.

The oil market’s volatility has slowed down in recent weeks, and prices stabilized around $40. The weak demand and expected pick up in supply could pressure down oil prices, whereas the weaker dollar may move oil prices upward. Despite these contradicting forces, the main question will revolve around the direction of oil demand. If we see some good news about the pandemic slowing down and more evidence of a possible vaccine becoming available by the end of the year, it could be enough to pull up oil prices to higher levels. Until such news emerges, the contradicting forces between changes in demand and supply vs. the weaker dollar are likely to keep oil prices at current levels.

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