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Oil: long recovery ahead
2020-07-23 • Updated
According to analysts from Citigroup, crude oil prices will never reach $100 a barrel again. They claimed that the idea to reach such a high level “has far more fantasy than reality at its heart”. It’s a really severe statement. What are the reasons?
Weak oil demand
The crude oil demand lowered by third of global pre-crisis levels. Indeed, the coronavirus forced governments all over the world to impose lockdowns and the stay-at-home regime. As a result, most factories were shut down and people didn’t use their petrol-driven vehicles for a long time. Now most economies started recovering. Nevertheless, the oil demand is still well below pre-crisis levels. Just think of fuel for airplanes, this industry may stay frozen for years. Many analysts have doubts that it will ever fully rebound as new virus cases are constantly rising. The International Energy Agency (IEA) predicts that the oil market won’t reach pre-pandemic levels until at least 2022.
At the same time, there are still some supply problems. OPEC+ members made an agreement to significantly cut the oil production. However, some countries didn’t follow it fully. Roughly only 87% of the agreed cuts have been reached in May. Iraq, Nigeria and Angola are responsible for this gap. However, Iraq promised to make extra cuts to obey the compliance. OPEC+ even claimed that the Iraq’s policy will be the most significant driver of oil prices in the third and fourth quarter.
Also, the International Energy Agency claimed that the global oil supply will drop by 7.2 million barrels per day this year and demand will decrease by 8.1. However, in the next year the IEA foresees the oil demand will rebound by 5.7 million barrels a day and supply will only soar by 1.8. It should definitely lead to higher oil prices. Goldman Sachs set the target price for WTI oil at $51 per barrel next year, and Bank of America – $47.
WTI oil prices have stabilized near $40 a barrel for quite a long time. They are likely to stay at this level for a while. If WTI oil breaks the resistance at the 200-day moving average at $43.0, it will surge to the next resistance at $47.5. Otherwise, if it falls below the low of July 13 at $39.5, it will plummet to the next support at $38.0. Oil prices are also driven by the market sentiment. In times of the risk-on mood, oil prices tend to climb up. Follow news!
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