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Challenges Ahead for the Crude Oil Price

Posted: Wednesday, September 16th, 2020

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The Organization of Petroleum Exporting Countries (OPEC) lowered its oil demand forecast for both the rest of 2020 and 2021, sending the crude oil price lower. In total, for the two years, OPEC slashed demand by 1.1 million b/d from last month’s report.

On top of that, the International Energy Agency (IEA) also hinted at a worsened outlook too. It cited the pandemic as the main reason why some OPEC members struggle to reach the production cuts they agreed on as targets.

More oil on the market, coupled with lower demand, leads to a lower crude oil price. Therefore, it is no wonder for the rejection at the $40 area, after bouncing from the negative $40 since late April.

Crude Oil Price

Negative Crude Oil Price – A 2020 Story

2020 brought the coronavirus pandemic to the world, and everything changed ever since. One of the most dramatic things in the financial market was the crude oil price diving below the zero level.

Last April, it settled at -$40, as there were no buyers for the futures contracts. As the clearinghouse signaled no intention to intervene, it let the price settle naturally – as it should. As a consequence, history books will mention from now on the day the crude oil price settled below the zero level.

Now that a precedent exists, the pressure on the price of oil will mount on any move lower that threatens to break the zero mark.

OPEC Cuts Helped the Price of Oil Recovery

Since the April historic move, the price of oil recovered to a positive $40. It was not like the economies around the world bounced back in a V-shape recovery. Instead, OPEC, Russia, and other nine non-member producing countries agreed to cut production so that to avoid flooding the market with oil that no one uses.

As such, the price of oil recovered, but far from previous levels. Moving forward, the slower the economic recovery and the more the pandemic affects the world, the more difficult for the price of oil to move higher.

Green Efforts Threaten the Price Of Oil

Governments all over the world and especially in developed countries, favor green policies. Europe leads the pack with the EU Green Deal, coming on top of corporations switching more and more to ESG practices where green policies dominate. Oil and oil-related products have no room in such a world.

In a symbol of a declining industry, Exxon was kicked out of the Dow Jones index. It was replaced by companies destined to lead the Dow further into the next decades, mostly technology-based companies.

U.S. Presidential Election Outcome

The U.S. presidential election may also impact the crude oil price. Should Biden win the White House, the chances are that one of the first things his administration would do is to restart negotiations with Iran.

If Iran’s oil hits the market again, expect the market to struggle accommodating over two million b/day in a stroke of a pen.

To sum up, the crude oil price faces a tough time ahead. Short, medium and long-term perspectives call for cautious ahead of higher prices.

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