The past three weeks have been very volatile for oil with WTI trading at around $37 on Thursday. Just when it appeared the oil bulls were taking prices to pre-pandemic levels; the Bears showed their teeth by taking the markets on a downward spiral.
We can look at what has really made the markets move in the past fortnight and what the fate of the oil markets are in the short-term.
Why are prices down?
Strong dollar and gasoline demand
Oil prices settled lower last week, pressured by a stronger U.S. Dollar, which dampened demand for the dollar-denominated commodity. The strength of the dollar would come as a surprise as markets predicted the bearish pattern of the dollar. Still, in line with the inverse relationship, Dollar got stronger and oil crumbled. In addition to the fall of oil prices last week, it was also observed that there was weak demand for gasoline in the short term. There were also expectations that refinery demand for crude will weaken in the fall.
A report from the U.S. government showed shrinking domestic crude and gasoline inventories. It is expected that many refineries will soon stop operations to conduct usual maintenance. The double whammy of maintenance of refineries and downturn in summertime fuel consumption gave oil a bearish outlook. Until schools and offices open, we are faced with a possibility of low demand and this weighed on oil prices.
The refined products market has remained weak, and this is no surprise given the impact on fuel consumption on the demand side. Very few Asian refiners are buying oil as they still have loads of oil bought when prices were low.
There were murmurings from state media that Iraq was seeking exemption from cuts and this weighed down on oil prices. Although Iraq’s oil ministry denied the reports in state media that the country was considering an exemption from its production quotas and obligations, the rumor portrayed cracks in the wall of the OPEC accord. Notably, there have been compliance issues with Iraq and Nigeria, and any sort of uncertainty influences prices downwards.
Saudi OSP cuts.
Saudi Aramco devalued its October official selling prices for crude supplies to Asia and the US, as the company forecasted slow demand of oil from these areas. The pandemic is still a major bear card in this market and until there is an equitable distribution of vaccines, it would still be a factor to consider before placing oil positions.
What gave The Bulls momentum earlier?
The calm before the storm
Two weeks ago, the Gulf of Mexico, which appears to be one of the largest production areas of US Oil, was taken aback by magnanimous hurricane levels. Hurricane Laura approaches the Texas-Louisiana coast and many energy participants wondered how it will impact the energy sector as the areas affected is mostly important oil and petroleum area in America. There was a disruption in the Oil Production as around 1.6 million barrels per day of offshore crude oil production were stopped as production members in the Gulf of Mexico had fled the areas. That amounted to over 80% of U.S. offshore crude oil production in the Gulf of Mexico. This affected inventories and sent prices up as supply was taken off the market.
Another situation that gave Bulls momentum was the decline of the dollar during that same period. It is evident there is an inverse relationship between the US dollar strength and oil prices. Dollar faced a bashing against other currencies as the U.S. economy proposed to keep the dollar lower. This gave a lift to crude oil prices.
Vandana Hari, founder of Vanda Insights said “as far as fundamentals are concerned, there is really not much to move oil around either way, which is why we have seen it pretty range-bound but within that, continuing to grind higher because of a weaker dollar.”
Goldman Sachs outlook
In a statement released from Goldman Sachs, the investment bank said, “Key to the resilience of spot prices, despite stalling inventory draws this summer, has been the steady rally in long-dated prices,”
The statement was so bullish to the markets, it was recommended as an effective portfolio hedge against uncertainty in other sectors. Analysts saw this as a positive sign, and this sustained the bullish outlook on prices.
World’s biggest independent oil trader says prices will rise above $80 due to gas crisis
The world’s largest independent oil trader, Vitol Group, has said that it expects crude oil price to climb above $80 per barrel in the next couple of weeks.
This follows the expectation that the global crude oil demand will rise by an extra half a million barrels per day by winter due to global gas crisis which has led to rise in gas prices and driving a rush for other alternative sources of fuel.
This was made known by the Chief Executive Officer of Vitol, Russel Hardy, during an interview in London on Thursday, where he said that oil is most likely headed above $80 a barrel, partly as higher gas prices boost demand.
What the Vitol Chief Executive Officer is saying
Hardy said that this could force OPEC+ producers to add more supply into the market.
He said, “Can demand surprise us to the upside because of power switching? Yes,” Hardy said. “Is it likely that there’s half a million barrels a day of extra demand that comes through because of gas pricing? Probably our view is, that is likely across winter.
“All people are worried about is that we’re missing pieces of stock which we normally have,” he said. “During the winter, demand for gas is massively higher than demand for gas during the summer. You have to store, there’s no two ways around it.”
Hardy’s bullish sentiments echoes that of the Group Managing Director of NNPC, Mele Kyari, who predicted higher oil prices in the next 3 months and Goldman Sachs Group Inc., which is predicting higher crude oil prices, especially if the winter months are colder than normal.
In case you missed it
Recall that yesterday, the NNPC said that the supply crisis which has negatively affected the global natural gas market and has led to rising prices, could push up oil prices by as much as $10 a barrel, which is about $86 per barrel over the next 3 to 6 months.
The NNPC boss pointed out that the global gas crisis which has led to an increase in gas prices will make energy consumers seek fuel alternatives to natural gas in the nearest future which might see demand for oil rising by as much as 1 million barrels per day with attendant effect on crude oil prices
Traders have been assessing the likely impact of a tightening natural gas market on the broader energy complex over the coming winter.
China’s data disappoints, as oil prices fall
China, the second-largest oil consumer globally, posted a slightly poor economic report which clouded the fuel demand outlook in the near term.
An earlier report by Caixin showed China’s manufacturing purchasing managers’ index (PMI) was 50.3 in July, lower than expected. On Saturday, manufacturing and nonmanufacturing PMIs came in at 50.4 and 53.3 respectively.
Business activity in the country has slowed due to higher raw material costs, equipment maintenance, recent floods, and the latest outbreak of COVID-19.
Asia’s biggest economy had been recovering at a rapid pace but if this recent slowdown deepens, the outlook will fall significantly. The outlook for crude demand is shaky, and that is unlikely to change until global vaccination rates improve.
Investors also looked forward to more oil production from the Organization of the Petroleum Exporting Countries and its allies (OPEC+).
Brent crude oil futures fell 1.05% at the time of writing this report and WTI crude oil futures fell 0.92%. According to reports, OPEC’s oil production rose to its highest level since April 2020 in July. Efforts to reduce production curbs will be further eased from August 1. Since then, Saudi Arabia has progressively ceased its voluntary supply cut.
There continues to be an increase in COVID-19 cases on a daily basis. A higher vaccination rate could however prevent the need for restrictive measures that caused fuel demand to plummet in 2020.
There will be no lockdown as the Delta variant of the virus fuels an outbreak of cases in mainly unvaccinated populations, but the situation is escalating, U.S. officials report.
The daily gasoline consumption of India, the third-biggest oil importer globally, exceeded pre-COVID-19 levels in July. While COVID-19 lockdowns were relaxed across the country, gas oil sales were low, indicating a sluggish industrial outlook.
Gold mining: Segilola mine produces first gold output, targets 85,000 ounces a year
Segilola Gold Mine, Nigeria’s first and largest industrial-scale gold mine owned by the Canadian mineral exploration company, Thor Explorations Limited poured its first gold from the mine in Osun state on Friday.
This was disclosed in a statement by Thor Explorations, reported by Bloomberg.
This represents a major step towards diversifying and maximizing Nigeria’s gold mineral reserves. The Canadian company has spent $100 million to build the mine, while Africa Finance Corp, its largest shareholder, provided $86 million in debt and equity financing.
The company added that the plant, which will now ramp up over the next six weeks, is targeting an output of 85,000 ounces a year, which is still below African gold mining outputs from the two biggest gold projects in Africa – Barrick Gold Corp’s Kibali in the Democratic Republic of Congo and Loulo-Gounkoto in Mali – which produced 808,000 ounces and 680,000 ounces respectively in 2020, according to Bloomberg.
Minister of Mines Olamilekan Adegbite also disclosed on Friday that Segilola Mine “proves to the mining world that Nigeria is the next big frontier mining destination,” adding that it is a testament to the Buhari’s administration drive to diversify the economy through the mining sector.
What you should know
Recall it was reported earlier this year that Segilola Gold Mine, Nigeria’s first and largest industrial-scale gold mine owned by the Canadian mineral exploration company, Thor Explorations Limited, is set to be completed in the first half of 2021.
The gold mine tagged “Segilola” is a high-grade gold project being developed in Osun state, Nigeria. It is expected to hasten Nigeria’s economic diversification and reduce unemployment among the youth populace.
Thor Explorations Limited announced that a set of encouraging drill results from its in-pit and extensional diamond core drilling program revealed that the gold mine is on course to pour its first gold in Q2 2021.