Recovering prices and global demand for oil has led major oil producers to start easing self-imposed production limits imposed in April during the peak of the COVID-19 lockdowns.
The latest monthly oil market report by the International Energy Agency is now cautiously optimistic around receiving global demand in the second half of 2020, resulting in major oil producers eyeing of a return to historical production levels.
Oil prices are critical for Australian consumers because they drive gas prices, which in turn drive the prices in wholesale electricity markets. Wholesale electricity prices in the NEM are currently around 40 per cent lower than prices at the same time last year.
Oil prices briefly collapsed into negative territory in April, but have recovered faster than many analysis’s predicted to hover around USD$40 per barrel driven by curtailed production and growing post-lockdown global demand.
The IEA reported global demand in June was 86.9 million barrels a day, down from the pre-COVID-19 demand levels of around 100 million barrels a day, but up from April when demand fell to nearly 70 million barrels a day.
OPEC responded with production cuts of 9.4 million barrels per day in April as massive oversupply crashed prices and threatened to fill global oil storages, leaving nowhere for surplus oil to go. Higher cost shale oil producers, mainly in the US and Canada, responded by switching off loss-making fields which has helped restore supply-demand balance.
The Organisation of Oil Exporting Countries (OPEC) alliance including Russia is now looking to gradually begin easing these output restrictions by around 2 million barrels per day, as its members look to recover market share vacated by North American suppliers.
it may be a premature sign of confidence given global oil storages still remain at record levels and are still growing, although floating storage of oil is now easing.
The emerging risk of a second round of COVID-19 infections and subsequent re-lockdowns could arrest demand growth and tip the market back into oversupply. Oil prices continue to track above $40 per barrel, suggesting the market remains confident of a rapid economic recovery despite the deteriorating medical reality in the US and other major markets.
Weakening oil prices will be bad news for Australia’s gas exporting industry but good news for consumers, sustaining soft energy market prices for the short to medium term.