Oil market is under pressure. Disagreements among OPEC+ countries, US increasing oil production, threat of reduction in demand for oil in the next years put the oil market under pressure. Along with this, sanctions against Iran and Venezuela cause tension among the oil supplying parties. Although Saudi Arabia said it will restore the declined supply, if it does that without any plan, namely increase the supply too much, it will have a negative impact on the prices. However, the prices are declining. Prices of WTI and Brent crudes have respectively been declining from $66 to $52 and from $73 to $62 since April. Even, despite the tensions in Persian Gulf last week, the prices did not rise as expected.
Source: Interactive Brokers, comparison of August futures prices
It’s still unknown whether or not OPEC+ will make a decision to cut output in July. It’s difficult to approach the issue unequivocally because the producing country faces threat of losing its market share when the prices are regulated by cutting production. On the other hand, there is a disagreement between the biggest oil producers - Saudi Arabia and Russia. Saudi Aramco’s participation in Russia’s Novatec Arctic LNG2 project reflects difficulty of the negotiations between the two countries. Despite the media earlier reported that Aramco refused this project, the new information shows that negotiations are underway.
Information in the US is more transparent and allows following the tendency. The chart compares US oil supply and oil in the storehouses with the WTI prices. The production in the US is at the record level and threat of weakening in the economy causes decline in the demand. According to the data for the last week, this tendency continues and the prices may fall to $40.
Source: Bloomberg, Mike McGlone
Dynamics of oil futures also allow to advance an ideas on the situation in the market. A backwardation is observed in the price structure of the futures. According to normal backwardation of Keynes, the sellers reduce future prices in order to involve purchasers. At the same time, as the purchasers expect decline in prices, they buy the oil in spot market.
As the chart shows, prices in all spot contracts are less than future contracts from October 2019 to October 2020.
Source: Interactive Brokers, backwardation in oil market
Uncertainty in both supply and demand may destabilize them in the future: "Global Head of Commodities Research at Goldman Sachs Jeffrey Currie thinks that it becomes difficult to say what production level will stabilize the prices in the oil market."
Nariman Yagubov