Oil prices declined today as the market finally prices in the underlying uncertainty over the oil demand’s recovery, Iraq’s cuts compliance and the additional effect of Covid-19 on the economy as a whole.
Rystad Energy’s daily market comment comes from its Head of Oil Markets Bjornar Tonhaugen:
"The oil market is a bit shaky today with traders willing to switch positions at lower levels than yesterday driven by three key factors in our view.
To begin with, there are growing concerns about the gasoline demand recovery in the US, following yesterday’s weekly DOE report on the US oil balance. Weekly implied gasoline demand in the US was reported down about 400 000 bpd week-on-week inferred by the estimates for stock changes, net trade and refinery output. However, our real-time traffic indicator data for the US does not confirm this low drop week-on-week, but rather a flat-lining since early-August.
Added to the gasoline demand data are concerns about Iraq’s owed production curtailments. The single-largest cut laggard in the OPEC+ agreement still “owes” more than 700 000 bpd of cuts for September 2020, which they will fail to achieve due to realities on the ground.
Although complying more or less 100% now with the reduced target cut of 849 000 bpd in August, they over-produced during May-July, and Iraq may be forced to seek an exemption from the OPEC+ cuts for a period of time in the near term, despite refusing to do it so far.
Iraq’s dire fiscal state makes the cuts tough to bear despite severe pressure from de-facto leader of the alliance, Saudi Arabia.
Time will tell how tolerant the OPEC+ alliance will be with Iraq, but for now Iraq may not be big enough of a hurdle to tip the alliance into a divorce. That said, on trading floors, the market is spooked by the potential risk and less cuts than promised from Iraq in the near term and that has taken a toll on prices.
Lastly, the third factor is the weaker-than-expected US jobs recovery, which was reported yesterday for August. The ADP numbers suggest headwinds to the oil demand recovery from the economic side, sending shivers about a jobless come-back as the US soon heads for elections.
Prices were due to react to bearish news since some time and today traders eventually priced in some uncertainty, following a prolonged period of ignoring worrying indications."
Read the article online at: https://www.oilfieldtechnology.com/special-reports/03092020/oil-declines-on-demand-concerns-iraqs-compliance/