Crude price: No longer permanent rather short cyclic in nature

Oil prices rose once again on rising and brent is now nearing $40 per barrel, a remarkable comeback after
crashing below $20 per barrel a little more than a month ago while West Texas Intermediate (WTI) rose to
above $38. It is imperative to note that the current fall in global crude oil prices is not a pure positive supply
shock, but is also a result of a weak demand induced shock due global lockdown to combat with COVID-19
pandemic. The world will soon bounce back from this pandemic, but the recovery will be rough and painful.
The current low oil price environment will also come to an end, with prices possibly spiking as demand
recovers. A balance market in terms of supply and demand is very much required for responsible price that
creates a win-win situation for every nation.
Considering the various disruption & other natural factor, the global crude supply & demand is gradually
moving away from a permanent instances to variable in nature and it will be more cyclic rather fixed in nature.
This scenario will force the crude price in short-term cycle (2 -3 years) and gradually the long term price tag of
crude will moved away. The present supply-demand scenario justify the short term price cycle.

Short-term supply & demand side factors that impact on crude price:
Supply Side:
There will be controlled supply in crude in the market due to following reason:

o OPEC+ production Cut: There's the anticipation that OPEC+ is going to agree to extend their
current levels of production cuts of 9.7 million barrels per day (bpd), or about 10% of global output for
another two months beyond June, at a meeting expected to be held in this week.

o Offshore oil field collapsing: In the North Sea, almost a third of the oil left on the UK continental
shelf is no longer economical to extract under crude price range of $45 / Barrel. So the production from
many offshore field of North Sea will be halt till the favourable price.

o Dropping Rig count in USA & Gulf of Mexico: The rig count in the Gulf of Mexico has also
fallen by almost half. It has fallen to 301 as on 31st May, 2020 from 931 a year ago (31.05.2019). Drilling
activity for extraction of crude from sub surface is at lowest level since 1949. It will certainly drop the
natural production.

o Drop in Shale oil production: U.S. oil production fell to 11.5 mb/d in May, from its peak
production of 13.6 mb/d before pandemic mainly due to drop of shale oil production.  According to Shale
Profile Analytics, U.S. oil production from major shale basins would plunge by 3 to 5 million barrels per
day if crude price remain low as Shale industry probably needs prices “around USD $45/Barrel to start any
significant recovery in completions and new drilling, and for many operators it would take USD 50 /bbl or
more.

This has been the problem of U.S. shale since its inception. It’s no secret that shale wells decline
precipitously after an initial burst of production. As a result, keeping production aloft requires a certain
amount of continuous drilling. Growing production requires a more aggressive level of spending and
drilling increases. Whatever money comes out of the ground must be re-injected into the next well. This
dynamic meant that the promise of huge profits proved to be a mirage in most cases.  To continue this
drilling process, the shale producer needs atleast 45 USD / Barrel.
o Another catalyst is the inventories data released by the American Petroleum Institute (API). Data showed
that US inventories declined by more than 500k barrels after rising by 8.7 million barrels a week before.

o Venezuela's oil exports plummeted in May to their lowest level since 2003 as US sanctions choked
exports. Traders are also monitoring Tropical Storm Cristobal in the Gulf of Mexico for its potential to
disrupt oil and gas facilities that may lead to the potential drop of crude production.
o CAPEX reduction in hydrocarbon exploration activities: The extent of oil and gas exploration and
production is largely driven by current oil prices, future expectations of oil prices, and availability of
resources. Exploration activities leads to find the hydrocarbon crude reserve that will be produced in long-
term. Higher oil prices generally lead to large investments in upstream operations, while lower oil prices
can lead to a drastic drop in new investment and also fewer Final Investment Decisions for oil projects.
Integrated oil and gas companies have reported the largest volume of CAPEX reductions for 2020 under
low crude price, especially in exploration activities for finding the new hydrocarbon reserves to protect
balance sheets
It is expected more than half of the world’s planned licensing rounds for hydrocarbon exploration to be
cancelled in 2020 due to the combined effect of the COVID-19 pandemic and the low oil prices. Newly
licensed oil and gas exploration acreage is likely to fall by about 60% for offshore and by 30% for onshore
acreage compared with 2019 levels.
This investment reduction in hydrocarbon Exploration worldwide leads the Oil & Gas reserve scarcity and
that leads to the less production in long run. It could send oil prices significantly higher due lesser
production as new oil & gas reserve will be less in future due not investment in exploration in low crude
price cycle.

Demand Side growth:

Global oil consumption will fall to just under 92 million bpd on average in 2020 compared with 100.2
million bpd in 2019 due to demand destruction through economic slowdown after Covid 19 pandemic.

There will be increasing demand in crude in the market due to following reason:
o Market anticipates that the reopening of economies around the world will increase demand and will get us
in a position such that, by August, the oil market will be in balance. The demand picture is looking brighter
as economies including China, the world's second-biggest oil consumer, start to recover from the pandemic.
China's services sector returned to growth for the first time since January, a private survey showed. China
is the outlier for now, easing travel restrictions and stimulus packages aimed at resuscitating economies
could accelerate global oil demand in the second half of 2020.

o The degree to which China is snapping back offers reason for some optimism about economic and demand
recovery trends in other markets such as Europe and North America. The gradual reopening of businesses
in a growing number of U.S. states and countries after shelter-in-place mandates caused by the coronavirus
pandemic also boosted fuel demand and aided oil prices. U.S. crude inventories fell by 483,000 barrels in
the week to May 29 to 531 million barrels, compared with analysts' expectations for a build of 3 million
barrels, data from industry group the American Petroleum Institute showed. In the United States - the top
oil producer and consumer - road fuel demand is expected to rise to 10.6 million bpd in the second half,
according to Rystad Energy, 22 per cent higher than the first half.

o Asia's total refined product demand could rise to 34.3 million bpd in the second half, up from 31.6 million
bpd in the first six months, but still about 1.5 million bpd lower from the same period a year ago, mainly
because of the decline in jet fuel demand

o In India, the world's No. 3 oil consumer, state refiners ramped up output in May as fuel sales recovered
ahead of the lockdown lifting in June.

o In Japan, the fourth largest oil user, gasoline demand is expected to contract by 10 per cent in October to
December, but rebound strongly from the 27 per cent contraction seen in April to June.
Negative factors for demand growth in long run:
o However, gasoline consumption will still be 5 % down from 2019 on higher unemployment, reduced
incomes and more people working from home.

o Less jet travel in 2020 with comparison to 2019

o It is difficult to predict how consumers lifestyles would change. People may prefer to continue working
from home and going out as little as possible to avoid being infected. It may leads less consumption of
petroleum products

o China threatens trade retaliation. After the U.S. downgraded its status with Hong Kong, following
Beijing’s new national security law in the territory, China is now threatening to curtail American farm
purchases. 

o US shale driller again will start drilling once price will be around $45 / Barrel and there will supply glut
again.

o Risks of 2nd wave hits of Covid-19 globally have also increased. It is particularly challenging for Latin
America, the Middle East and Africa, and to a lesser extent South Asia

o Rising trade tensions between China & US, curfews across the US due to social unrest, and permanent
labor destruction will dampen the demand outlook

Conclusion
To regain demand levels and break out higher, either the oil market will have to rebalance, or demand
outlook should weigh major breakthroughs in finding a vaccine for COVID-19, and for US-China to play
nice. Geo-political issue will also play a major role. No single reason is not now persisting the variation of
oil price, rather the crude nowadays depends on many reason and they have mostly individual character. All
these reason may not be favourable in the same time for high price and vice versa. All these factors that
have been discussed above for creation of crude supply & demand environment are purely engaged with
uncertainty. It is difficult to predict when and which factors will be moved away.
The crude price will be no longer stable for a long time and it will be cyclic in nature and industry has to
adopt this new normal of crude price and prepare their strategy.