Thu, 09/03/2020 - 09:59
As the coronavirus crisis enters its seventh month, the extent of the economic damage caused is clear for all to see. Virtually every sector has felt the negative impact, but few more acutely than energy. With many companies operating at severely limited capacity and other ceasing trading altogether, demand for oil and other everyday energy sources fell through the floor. In fact, it even got so bad that, in April, Brent dropped below $20 a barrel – its lowest level in 18 years! That said, it’s of course worth noting that the Russia-Saudi price war also played a role in oil’s demise during Q2 2020.
Of course, the nature of this historic crash was such that it was always bound to be temporary. Indeed, once the lockdown was eased and agreements reached between the world’s biggest oil-producing nations, we saw a gradual but purposeful rise in oil’s fortunes. As a result, Brent now sits at a respectable $45.58 per barrel after gaining over 100% in a period of four short months. And black gold’s recovery doesn’t seem to be showing any signs of slowing amid an overwhelmingly positive news climate just now.
API weekly data
Amid analyst predictions of a meagre 1.887 million barrels, the American Petroleum Institute (API) reported a 6.360 million-barrel draw in crude oil inventories for the week ending 28/08/2020. The report, which was released this Tuesday (01/09/2020), marked a second consecutive week in which the actual inventory draw exceeded expert forecasts by a significant margin. It would appear, then, that demand is far outstripping the expectations of producers, which is a good sign for the oil bulls. Despite the success of OPEC’s oil production cut pact, worldwide demand is still significantly subdued. US inventory figures thus remain a closely watched metric and – if next week’s data show a similar trend – there would no longer be any doubt that demand for the energy resource is well on the road to recovery.
China to the rescue
As strange as it might sound, Chinese demand for crude oil has been one of the key drivers in the current oil market recovery. Moreover, contrary to many analysts’ predictions, demand from China remained remarkably robust throughout July and August. A recent survey for the month of August showed that China’s services sector grew faster than it has in over two and a half years. This report, which the Chinese dub the Non-Manufacturing PMI is a core indicator of the health of the country’s economy. And with China’s resurgence looking good value to continue, there’s no reason to suspect that this demand will subside anytime soon.
Weaker dollar
Another huge factor in oil’s recovery is the ever-weaker US dollar. When the crisis was at its height, this traditional safe-haven asset surged in value but, as the pandemic was brought under control, it steadily corrected down to more sustainable levels. While often overlooked, this factor is perhaps as important as production cuts when it comes to fuel global demand. With oil being a dollar-denominated commodity, a weak greenback means lower import costs for non-oil-producing nations and thus makes purchasing the energy resource a more attractive proposition.
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The truth is, nobody knows for sure where the market is headed. And while the evidence would suggest that the worst is now behind oil, every extended rally can easily be accompanied by a short-term correction to the downside. So, if you think you know where the market is going in the near future, why not put your predictions to the test?
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