On the week when OPEC (Organization of Petroleum Exporting Countries) celebrates its sixtieth birthday, the organization sends a bearish oil market report. It slashed its estimates for 2020 demand by 400,000 barrels per day. Moreover, it cut the demand for 2021 by another 770,000 barrels per day from last month’s report, basically signaling sluggish growth and inconsistent demand for the period ahead.
As global economies struggle with the coronavirus pandemic, so does OPEC. The organization faces an existential crisis, with many calling for its end sooner rather than later.
Green trends emerging in the developed world push consumption away from oil-related products. With the exception of China, and perhaps Vietnam, there is no economic growth in the world in 2020. For OPEC, GDP contraction means less oil distributed, meaning less revenues.
Challenges Ahead for Crude Oil and OPEC
2020 brought the historic decline for the price of oil below zero. Not only that the futures clearinghouse let oil trading below zero; it settled to $-40 in April. From that level to the current $37, it took coordinated action from OPEC and friends to tackle the challenges ahead.
To start with, OPEC (its thirteen members) teamed up with other major producers, including Russia, and delivered coordinated production cuts to stabilize the price of oil.
Global trade took a step back since COVID-19 has hit the world. Increased isolationism and protectionism put pressure on the shipping industry – an oil-intensive industry.
For many major economies in the world, even 2021 reflects economic contraction when compared to pre-pandemic levels. For instance, the Eurozone economies are forecast to contract -7.7% in 2020 and to grow by 4.3% in 2021. However, a percentage from a lower value results in lower absolute values – meaning that even by the end of 2021, the Eurozone economies will consume less oil than pre-pandemic. And this is valid as long as the outlook is not worsening, as it very well may.
The U.S. presidential elections also play a major role in the price of oil. Should Biden win the White House, the expectations are that the U.S. will quickly start talks with Iran and possible sanctions relief brings even more oil to the market. Should the Iranian oil come back to the market, there is an estimate of 2.5 million barrels/day that need to be accommodated – either via further coordinated cuts or the price of oil will decline.