The challenges for oil

This week we are starting to see oil cuts being rolled back, the historic supply cut agreement we have seen for much of the 2020 year ended on July 31. Concerns over too much oil supply have already affected markets this week with worries that several nations had increased production ending their voluntary cut agreement through out the month of July. For August, oil cuts are to be tapered further to 7.7m barrel per day from the Organization of Petroleum Exporting Countries (OPEC) and their allies.

Earlier in the year oil prices went into freefall reaching negative prices, amid an over supply of oil from a price war between Saudi Arabia and Russia all the while a backdrop of a pandemic induced reduction in demand. To restore oil prices a supply cut agreement of 9.7m barrels per day was made, while prices have somewhat recovered, they are still well below 2019 highs. The current global backdrop still has left multiple challenges for the entire oil industry, who face continued lacklustre demand which is likely to remain for some time to come.

Now, OPEC has even more to contend with, a balancing act between prices and production and supply is a very fine line. Too much supply, and another price collapse could occur, to0 high a price and the US oil production arm begins to sap market share. Add in a touch of banking reform on fossil fuels, an uncertain timeline for demand recovery and oil cut cheats to the mix and it creates a whisker thin line for price control.

The efforts are almost counter productive to one another as well, making the scenario all the more difficult to navigate for the nations that rely on oil exports. Demand is the key issue for the oil industry, and unless there are strong improvements in this area through entire sectors not just industries then being accurate with oil forecasting is likely to be difficult.

WTI over Brent vs USD – 1HR

Reprinted from FX Street. The copyright all reserved by the original author.

https://www.fxstreet.com/analy...