Commodity price movements
The price of oil fell more sharply in March 2020 than in 2018. The covid-19 health situation has created uncertainty about demand, which has declined globally as a result of lockdowns that have limited the mobility and operation of economic activities, as well as overproduction caused by Russia’s refusal to cut production and Saudi Arabia’s increasing production to drive prices down until April. However, in May, prices rose significantly due to the recovery in business activity, a decrease in production, and inventories, as demand exceeded supply.
Then, in September and October, uncertainty about the second wave of covid-19 and the return of Libyan production caused prices to fall despite reductions in supply and increased Chinese imports.
Finally, there was great volatility at the beginning of November, affected by the American election and the possibility of maintaining the current OPEC+ restrictions.
The events that will be important to follow are the meetings of the OPEC + on 30 November and 1st December which will discuss the measures to be taken to stabilise oil prices.
Forward curves
The events that will be important to follow are the meetings of the OPEC + on 30 November and 1st December which will discuss the measures to be taken to stabilise oil prices.
As far as the forward curve is concerned, the market is currently in a contango situation, which is getting stronger due to demand predictions.
Supply and Demand dynamic of the commodity:
As for all the oil industry on these troubled times, the Russian industry has been affected as well by the covid-19 pandemic. According to Russia’s energy minister, Alexander Novak, the global oil demand could fall by 9 to 10 million bpd because of the pandemic. Exports are still going down, causing Russia to call for a global response regarding the oil demand crisis. As matter of fact, the fuel demand went down by 30%, this may also be caused by a sudden decrease of trucking activity. The situation is most likely not going to get any better, considering that a lot of countries are again taking drastic measures to limit transit through countries and even within their own territories. This will again lower oil products demand, as less will be needed, be it for plane, car, or even boat.
The following graphs shows the Russian oil production, and how it drastically drops in 2020, mostly due to the global pandemic of covid-19
Finally, Russia’s crude oil supply going down may also be explained by the OPEC+ deal. This deal aimed to limit the commodity production, by reducing it by 7.7 million bpd and so increase oil price, by limiting its supply. The deal was to be eased starting January 2021, by limiting the production by 5.7 million bpd instead of 7.7 million. However, the situation probably won’t improve, as a second wave of covid-19 arises, and Russia is asking to extend the deal to March 2021, without reducing the production cut by the planned 2 million bpd, and keeping it as intended instead.
Russian oil reserves:
As for Russian oil reserves, the graph below shows what amount they possessed up until 2019. Its reserve were of 14,7 billion metric tons in 2019, amounting to 6% of the global oil reserves. However, the reserves dropped these last month, in fact, it dropped by almost 10 million metric tons from June to August. If this trend keeps on going, Russia’s oil reserves should keep going down. However, there is an oil supply deficit, and if the situation gets better, the oil market could recover from this pandemic quite quickly.
Recommendation:
The situation being extremely unstable due to the covid-19 situation, it is hard to make good predictions, but demand should still keep go down because of the second wave, considering this, it would be better to be short for the upcoming months. Then, crude being at a low, and the market in contango, it might be an interesting choice to be long on the long run. In fact, if all the measures taken by the OPEC+ are indeed efficient in limiting supply, and demand also increases, the market should improve, and oil prices go up.
References:
“Tout comprendre à la nouvelle crise pétrolière”. Consulté le 2 novembre
https://www.capital.fr/economie-politique/tout-comprendre-a-la-nouvelle-crise-petroliere-1372124
“The Commodity Markets Outlook in eight charts”. Consulté le 2 novembre
https://blogs.worldbank.org/voices/commodity-markets-outlook-eight-charts
“Oil Drops on Covid-19 Resurgence, Extra Libyan Crude”. Consulté le 2 novembre
https://www.wsj.com/articles/oil-drops-on-covid-19-resurgence-extra-libyan-crude-11603717523
“Coronavirus surge throws oil recovery into reverse: Kemp”. Consulté le 3 novembre
https://www.reuters.com/article/us-global-oil-kemp-column/coronavirus-surge-throws-oil-recovery-into-reverse-kemp-idUSKBN27K1NW
“Oil Recovery Expected to Falter Though Supply Glut Shrinks”. Consulté le 3 novembre
https://www.wsj.com/articles/oil-recovery-expected-to-falter-though-supply-glut-shrinks-11602664747
“Oil Prices Close Higher After Volatile Session”. Consulté le 3 novembre
https://www.wsj.com/articles/oil-prices-slide-to-five-month-lows-as-lockdowns-hit-demand-11604325947
“OPEC and Russia study deeper oil cuts – two sources”. Consulté le 4 novembre
https://www.reuters.com/article/opec-algeria/opec-and-russia-study-deeper-oil-cuts-two-sources-idUSKBN27J27X
https://www.opec.org/opec_web/en/311.htm. Consulté le 4 novembre
https://www.opec.org/opec_web/en/publications/338.htm (monthly report p.5). Consulté le 4 novembre
“Russia’s Novak says 2020 oil demand could fall by up to 10 mln bpd”. Consulté le 1 novembre
https://energy.economictimes.indiatimes.com/news/oil-and-gas/russias-novak-says-2020-oil-demand-could-fall-by-up-to-10-mln-bpd/77942150
“Russia Calls For A Global Response To The Oil Demand Crisis”. Consulté le 1 novembre
https://oilprice.com/Energy/Energy-General/Russia-Calls-For-A-Global-Response-To-The-Oil-Demand-Crisis.html
https://take-profit.org/en/statistics/crude-oil-production/russia/. Consulté le 1 novembre
“OPEC and non-OPEC allies urge ‘full conformity’ with production cuts as oil prices falter”. Consulté le 2 novembre
https://www.cnbc.com/2020/09/17/opec-meeting-saudi-russia-review-oil-output-cuts-amid-demand-concerns.html
“Russia Discusses Three-Month Extension Of OPEC+ Oil Production Cuts”. Consulté le 3 novembre
https://oilprice.com/Latest-Energy-News/World-News/Russia-Discusses-Three-Month-Extension-Of-OPEC-Oil-Production-Cuts.html
“Russian Oil Minister: Global Oil Inventories Are In Decline”. Consulté le 3 novembre
https://oilprice.com/Energy/Crude-Oil/Russian-Oil-Minister-Global-Oil-Inventories-Are-In-Decline.html
https://www.statista.com/statistics/264390/oil-reserves-in-russia-since-1990/
Consulté le 3 novembre