After plunging to unprecedented levels between March and April on the back of the coronavirus outbreak, crude oil prices have begun to recover with international benchmarks Brent and the United States West Texas Intermediate seeing gains in recent weeks.
The recovery in the global oil market is in part due to historic output cuts that have been in place since April, under an agreement between the Organization of Petroleum Exporting Countries, its allies, and other non-OPEC producers. The landmark cuts were on Saturday extended by a month – till the end of July – in a virtual meeting of the oil cartel, news of which sent Brent crude above $42 per barrel at the weekend.
More so, economies around the world are emerging out of lockdowns and other movement restrictions imposed to curb the spread of the new coronavirus. With more vehicles getting back on the road and airlines resuming operations – there was a recovery in demand for air travel May – there has been an increase in demand for fuel, pushing up prices.
While the outlook for demand recovery is positive, driven by output cuts from OPEC+ and curtailments in North America, the rebound in crude oil prices seen in recent weeks may be short-lived, experts have said, as the oil market fundamentals appear to be turning bearish once again.
There is a chance Brent crude could slip back to $35 per barrel in the short term according to investment banking giant Goldman Sachs, which cited a number of factors that could see oil prices drop in the coming weeks.
The American bank had early last month predicted that oil demand could rebound enough to exceed supply by the end of May. It has backtracked on the ambitious consumption forecast, with recovery in demand expected to be slow and still highly uncertain in the short term, especially due to low returns from refining.
Returning production from shale producers in the United States and Libya will also prove influential, the bank said. Some American shale producers are reportedly bringing back shut-in production this month while Tripoli has confirmed plans to resume production at two of its largest oilfields. The latter comes after production was halted for almost six months, due to conflicts in the North African country.
Prices are also closing in on levels where Chinese opportunistic oil purchase would slow, and there is still a massive 1 billion barrel of crude outstanding in global oil inventories, Goldman said.
With OPEC’s latest output cut already overpriced, there will most likely be a reduction in prices in the coming weeks with the short term forecast for Brent crude at $35 per barrel as against the spot prices of $43 per barrel. Despite the oil price surge in May, poor refining margins and the recent sharp decline in U.S. crude bases have given rise to a bearish outlook, the bank said.