Oil prices remained high over the past week, despite China liberating crude oil from its strategic reserves to ease pressure on local refiners, in an unprecedented intervention in the global market. Brent crude was trading near $73 a barrel and WTI near $70 a barrel, driven by bullish US demand and inventory data and the effects of Hurricane Ida on production in the Gulf of Mexico. However, it should be noted here that the political use of China’s large crude reserves to influence prices, adds to the markets an additional layer of uncertainty.
The Energy Information Administration reported a 1.5 million barrel drop in stockpiles for the week ending September 3, with a significant drawdown in fuel stocks as well. The administration said: Crude oil stocks at 423.9 million barrels are below the five-year average for this time of year. The average level of oil production in the United States during the past four weeks was 11.075 million barrels per day, the lowest level since February 2021. At the same time, the most supportive signal for prices was the data on a decrease in total fuel supplies, this data is an indirect indicator of demand .
Some analysts describe the current situation in the market as calm before the storm, and investors are closely monitoring the production situation in the “OPEC +” countries. Some believe that the group will have to abandon the increase in production or even start reducing it to avoid another increase in crude oil stocks. In addition, the situation in the Gulf of Mexico remains uncertain. As of last Friday, about 66 percent (1.2 million barrels per day) of Gulf of Mexico oil production was still shut down after Hurricane Ida. In Louisiana, five oil refineries have not yet resumed work, with an estimated capacity of about one million barrels per day: approximately 6 percent of the total refining capacity of the United States.
According to the EIA’s Short-Term Monthly Report, the US Department of Energy expects oil production in the Gulf of Mexico to be fully restored after Hurricane Ida during September. In this regard, the report stated: “We expect oil production in the Gulf of Mexico to recover gradually during September to 1.2 million barrels per day before returning to an average of 1.7 million barrels per day in the fourth quarter.”
And in the week before last, the reaction of the oil markets was also growth, against the backdrop of the “OPEC +” alliance announcing the production policy by adhering to previously approved plans to increase production by 0.4 million barrels per day and extending the period of compensation for excess production. At that time, Brent crude prices rose to above $73.0 a barrel and West Texas Intermediate crude – to above $70.0 a barrel. The group’s technical committee reported an expected oil deficit in 2021 of 0.9 million barrels per day. Oil stocks in OECD countries are expected to remain low until May 2022. In 2022, oil markets may return to an estimated surplus of 1.6 million barrels per day. The next meeting of the group is scheduled for the fourth of October (October). However, after the “OPEC +” meeting, a downward correction began in the market and prices fell to the levels of 68 and 72 dollars per barrel for WTI and Brent, respectively. This was supported by the decline in oil imports to China in August of about 6.2 y/y, and the gradual recovery of oil production in the Gulf of Mexico. It could take several weeks for production to return to full capacity due to continued rainfall in the Gulf of Mexico and the US coast, hampering the process of returning personnel to rigs.
In addition, in September, financial factors may begin to affect oil prices, as investors closely monitor regulators and central bank policies in anticipation of starting to scale back stimulus programs, affecting the dollar’s exchange rate. However, the market is widely expected to consolidate in the near future near current levels.
In general, the beginning of last week for oil passed almost unchanged compared to trading prices on Friday. Investors and traders continue to monitor several factors: the recovery in fuel demand, the spread of new strains of the Corona virus, as well as the repercussions of Hurricane Ida in the United States. Also, China’s intent to use its strategic stockpile to adjust oil prices would be interesting to watch in the future as a new element of supply risk in the short term, as its stock could be used more frequently than the emergency reserves of the United States’ strategic reserve. However, the markets are aware that any additional use of the strategic reserve will only have a short-term effect on China’s spot purchases, as it will need to increase purchases again next year to meet demand, and perhaps also to refill any additional inventory draws.
In any case, in the coming weeks, expectations of lower prices are unlikely to come true, as some of the largest economies in the world are witnessing a shift in oil consumption rates, and some have even begun to exceed pre-pandemic levels, at a time when low rates of Covid infection are leading – 19 to recover activity. Indeed, the worst period for Asian fuel demand is over, especially in China and India.
Indeed, for the time being, the short-term outlook for the oil market is positive, as it is widely expected that Brent crude will continue to trade in a range between $70 and $75 a barrel in anticipation of new factors. But the main problem for the six months to next year is the potential global financial crisis, triggered by the pandemic and a ballooning debt bubble, both among countries and in the corporate environment. And any crisis in this aspect can easily lead to a reduction in energy prices, as consumption will be significantly reduced.
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