Oil slide expected in August as OPEC+ may boost production

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SME Times News Bureau | 14 Jul, 2020
Even as the global economy goes in an unlock mode with gradual pick up in economic activity, the oil market is expected to remain subdued with expectation that crude oil prices may again fall below $40 a barrel next month.

A crucial meeting of the Organization of Petroleum Exporting Countries (OPEC) and Russia is scheduled on Wednesday by video conference to discuss producers' approach to the market. The meeting is likely to decide on easing of production cuts from next month, a move that may halt crude price rise and if demand conditions actually don't meet up to expectations, may trigger a free fall again.

A bigger global effort to stabilise oil prices involving all major oil producers from the effects of COVID-19 and general economic slowdown resulted in OPEC + deciding in April to take away about 9.7 million barrels of oil per day from the market. The cut got extended till July owing to unprecedented demand fall due to COVID-19 pandemic. Saudi Arabia increased the production cut by an additional 1 million barrels per day. Now with global economy opening up, and signs of gradual pick up in demand, oil producers want to maintain their market share by pumping more oil into the market.

"The demand for oil, though has picked up, is unlikely to sustain for long if COVID-19 pandemic further expands its grip across economies and impacts demand. I believe that production increase from August would ease oil prices again and take it around $35-40 a barrel mark," said an oil sector analyst asking not to be named.

This should be good news for India that imports 85 per cent of its oil requirements. Lower oil price could not only help lower India's oil import bill, but could also reduce subsidy on LPG and Kerosene while keeping retail auto fuel prices low. With government also increasing spending on schemes to check the COVID-19 pandemic and revive a crisis ridden economy, lower oil prices give it the ability to increase taxes on petroleum products to raise revenue.

It is expected that OPEC + may agree to pump in additional 2 million barrels of oil per day from next month. This would have a marginal impact on the market as demand for oil globally fell by 16 million barrels a day in the April-June quarter (as compared to same period in 2019) and even with recovery, the already oversupplied market would be enough to meet all the needs without causing any price rise.

The oil producers are looking at July data with hope of a demand pick up. With the easing of lockdown and pick up in economic activity, more cars are being driven on roads and subsequently demand for gasoline has increased. In India too, fuel sales that plummeted in April, had reached around 80 per cent of normal levels now.

Demand in big oil importing countries like India and China is important for oil producers as it would determine how much oil the world would guzzle.

Global crude price has been steady for over a month with benchmark crude hovering around $42.25 a barrel on Tuesday. The crude prices have been over $40 a barrel for over a month now with slight changes in between. For major producers, the current price line is adequate if it can sustain additional volumes.

Oil prices have been on a wild ride in the last few months. It plummeted in April into negative zone in United States despite a deal earlier by OPEC and the other oil-producing nations for deep cuts in their May and June production, as demand collapsed and market went into a glut with traders and producers finding little space even to store unsold oil. But just a month later, oil again climbed to over $30 a barrel as production cuts began to take effect. With opening of economies from lockdown and a further pick up in demand oil climbed over $40 a barrel last month and had remained in that range since then.