The Saudis are lowering oil prices yet again. WTI under 39 dollars

The fall of oil prices that we have witnessed during the end of the past week has grown even more intense starting the new week with pretty much the same results. The oil prices keep on falling due to lower demand for oil derivatives, unstable supply, and also due to further oil price discounts that have been offered by OPEC leader to Asian buyers (which is the key market). Similar behavior on the Saudi side led to the oil price war during March and we all know what it meant for oil prices.


Slower demand recovery

Because the fall in oil demand has been massive since the beginning of the pandemic, the OPEC together with Russia decided for strict production cuts. However, these shouldn’t be so severe and the market supply should gradually adjust to market demand. Be it as it may, the data from the US market from the last week indicate that the market demand recovery process might be more arduous than previously expected. Lower gasoline demand and pressure for lower prices might be one of these indications. Another pressure for oil prices is the fact that Iraq asked for an extension to meet the OPEC+ quotas. But problems arise also on the supplier’s side where OPEC+ has lowered cuts to 7,7 million barrels during August. Bigger extraction activity can be observed also in the US. 


Beginning of another price war? 

We all remember the price war between Saudi Arabia and Russia. It started when Russia refused to lower the oil production further to which Saudis responded by increasing the production and significantly discounting the oil for their buyers. And it is the discounts on their light oil with delivery in October that Saudi Arabia has announced even now, this time for buyers from Asia. At the same time, the state-owned company Saudi Aramco reduced the price of oil for US buyers for the first time in the last 6 months. Plus in August, oil imports to China have decreased for the second month in a row, and in September they are likely to reduce their imports even more. US oil WTI is responding to the news by weakening to below $ 39 a barrel, while Brent is falling below $ 42.


Figure2: 12H WTI oil chart (zdroj: cTrader PurpleTrading)

Oil price growth renewal might take several months

Oil demand will not return to its pre-pandemic levels for another two to three years. The resumption of demand itself, however, seems to be a little slower than expected, and Saudi Aramco had to respond by reducing the oil prices. From a technical point of view, the price correction has been a sensible solution for quite some time. Despite this, the price is still expected to return gradually towards 45 dollars per barrel. But it will take some time. 

Right now, the summer season is ending which usually means that we can expect higher oil demand. As the Autumn weather will arrive, we might expect the increase in COVID cases which can subsequently lead to companies letting their employees work from home. The oil can therefore continue its gradual correction for several weeks but production cuts will save it from further fall. Another growth trend may not come until the vaccine will be developed, however, the economy is still in a bad shape and it will take several years to regain its former state. 


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