Saudi Aramco has fully restored the damaged production from the Abqaiq and Khurais facilities from just a few weeks ago, an impressive turnaround in such a short period of time.
But now, Riyadh faces another challenge that could prove more daunting.
The oil market has demonstrated its inability to sustain a price rally as market traders are giving no premium to geopolitical risk. Instead, weak demand dominates, and oversupply looms. Brent fell below $60 per barrel this week as a wave of dismal economic news deepened fears of a global economic slowdown.
Oil demand forecasts have already been slashed several times this year, and the IEA’s executive director said this week that another downward revision was likely. “Looking at the global economy weakening…China, the driver of global oil demand, experiencing the lowest economic growth since 30 years. The advanced economies are slowing down. We may well revise down our demand numbers in the next days or months to come,” the IEA’s Fatih Birol said.
Top officials from OPEC and the non-OPEC partners recognize the predicament. “Of course, demand is affected by the status of the global economy, and the economy is slowing down,” Russian Energy Minister Alexander Novak said in Moscow. But for now, there appears to be no change of strategy. “There are no crisis events that call for an emergency meeting.”
That may change if things continue to worsen. In a report on October 3, Standard Chartered marveled at how oil demand growth has plunged to a 10-year low. “This is the third consecutive month of y/y demand falls according to our disaggregated monthly balance model, the first time this has happened since 2009,” the investment bank wrote. “Over the past 10 years, oil demand has risen y/y in 113 months and fallen in just seven. However, five of those seven falls have occurred in the past eight months.”
In short, not since the global financial crisis has oil demand growth been this weak. Standard Chartered estimates that seven countries have posted year-on-year declines in demand of at least 100,000 bpd – Mexico, Canada, Saudi Arabia, Italy, the Netherlands, Turkey and Korea.
There are a few surprising and notable aspects about the current slide in oil prices. First, it comes just a few weeks after the largest supply disruption in oil market history. After a brief spike, prices fell back and the lasting impact has been negligible.
But another intriguing issue with the current downturn is the fact that the U.S. shale industry is being squeezed by poor financials, and production has already slowed dramatically. The recent fall in prices will put even more pressure on embattled drillers.
One would think that oil traders would begin factoring shale production growth undershooting expectations, which, all things equal, would put upward pressure on prices. But that is not the case.
That brings the focus back to demand. “For the market to be pushing prices lower at a point when the US oil industry is already in distress implies a more pessimistic market view of the global economy than is currently priced in most other asset markets in our view,” Standard Chartered said. WTI is not far away from a sub-$50 price.
Saudi energy minister Prince Abdulaziz bin Salman drew a similar conclusion in comments to reporters in Moscow this week, but seemed more confident that the market would wake up to the fact that shale will disappoint. “There are things that are real, and things that are perceived. We are driven by negative expectations,” Prince Abdulaziz said. “On the demand side, yes it’s been lower, but people need to understand that supply also may become lower.”
For now, lower-than-expected shale output is not sowing the seeds of a price rebound, not with the global economy slamming on the brakes.
If oil continues to lurch downwards, OPEC+ may have to revisit its plan of staying the course. As of now, the production cut agreement is set to expire in March, but an economic downturn may require deeper production cuts, or at a minimum, an extension of the current arrangement.
By Nick Cunningham of Oilprice.com
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