Renewed restrictions on travel and social gatherings across Europe, along with the winding down of state support programmes for companies, have had a severe impact on demand for crude oil. After a record 9.7m b/d drop in Opec + output in May, oil producers are now considering easing curbs on output. And their disagreement will bring about a serious market crisis.
In the past two months, the International Energy Agency has cut its forecast by 400,000 barrels a day, while Opec has cut its forecast by 500,000 barrels a day, with further cuts likely to come. Neil O 'Donoghue, head of the IEA's oil industry and markets division, Neil Atkinson, its economist, said Thursday that its demand forecast for the next monthly report was more likely to be down than up.
Standard Chartered analysts, including Emily Ashford and Paul Horsnell, said in a report last week that the biggest headwinds to oil demand come from reduced trade, a weak economy and the knock-on effects of business closures and job losses.
Just when oil demand should be recovering, it is going into reverse. A rise in cases of the virus in Europe has prompted a new wave of work-from-home advice and restrictions on social activities that are set to clash with financial support measures. Oil consumption in the United States faces similar obstacles, and government support under the Coronavirus Assistance, Relief, and Economic Security Act will end on September 30. Asia isn't immune either, with Thailand the only country close to a V-shaped recovery in oil demand, according to Standard Chartered.
It's not all about demand, of course. Additional supply from Opec countries also depends on oil supply from elsewhere, and there are as many uncertainties about that as there are about demand.
There are fears that U.S. shale oil production will fall sharply again in the coming weeks and months. Emily Ashford warns that well completions in the U.S. are so low right now that we could soon see a significant monthly decline in production.
Stronger monthly data from the US Energy Information Administration (EIA) showed domestic crude production has fallen more sharply this year than preliminary data showed last week. If U.S. production falls again, that will leave more room for Opec + to increase production.
Even among the world's biggest oil traders, such as Vitol Group, Trafigura Group and Mercuria Energy Group, oil majors don't agree on the outlook for oil in the coming months. Marco Rubio, Mercuria's chief executive, Durand says Opec is planning to start pumping extra oil we don't need in January. Trafigura's executives are pessimistic, but Vitol is more optimistic than its rivals.
With so much uncertainty, it is not surprising that tensions are emerging within the Opec + group. For Saudi Arabia, the most important thing is to prevent a slide in prices, with the country's energy minister saying Opec + would "pre-empt" supply from outstripping demand, making oil traders "as nervous as possible".
Russia's prime minister, Alexander Medvedev, Alexander Novak, chief executive, was more cautious, wanting to avoid repeatedly revising a deal that sets production targets until the end of April 2022. Under the deal, the group will increase its total production by another 2 million barrels per day from early January, and Mr Novak prefers to watch the market as much as possible and be cautious before making a decision to change.
It's worth noting that a similar split emerged within Opec in March, when Russia wanted to maintain the status quo and Saudi Arabia sought further cuts, sparking a brief "free-for-all" that sent prices below $20 a barrel.