Dr. Gil Michael Befman, Chief Economist of Bank Leumi“Looking ahead, the oil price will be affected by doubts about the continued low level of output of OPEC + member countries, with an emphasis on Russia and Iraq, and estimates of the spread of the corona virus worldwide, especially in China and the US, and its effects on the world economy. While the OPEC + group estimates that demand for oil will continue to rise, we believe that there is a real risk of expected demand for oil in the near future, even though demand for certain petroleum products has begun to rise from the low level. ”
“This combination of global supply, which is about to expand again in the face of relatively weak demand, is expected to have a negative effect on oil prices in the near future.. “If the second wave of the corona virus continues in large areas and continues to spread at a high rate in the United States, then there is a risk of a return to social restrictions that will slow economic activity and reduce the demand for oil.”
Development of the price of oil in the last three months
Source: Bank Leumi Overview
On Demand for fuel Befman writes, “The demand for fuel is still about 60% lower than it was before the outbreak of the corona virus. We estimate that by the end of the year, the average daily demand for fuel in the United States is not expected to exceed 9 million barrels per day.
“In China, the closures in some areas along with the floods have weighed on domestic demand for gasoline in China and together with China’s full oil reserves they have caused Chinese refineries to increase the amount of gasoline exported to the highest level in the last four months and reduce China’s refinery activity. Of July at a rate of about 70.19%. ”
Millions of barrels a day
Overview: Bank Leumi source
On the supply side adds Befman “There was a sharp weekly decline of 10.6 million barrels of oil in U.S. commercial inventory, the largest decline in commercial oil inventory since December 2019. Most of the sharp decline in inventory was due to a sharp decline in net oil imports which fell by 1,014,000 barrels per day
“On the global supply side – OPEC + is considering increasing oil production in light of its estimates that demand for oil will continue to rise. Saudi Arabia is seeking to increase its oil output after it emerged it did not benefit from cuts in production due to the price war with Russia, despite rising prices.” That the increase in oil production by OPEC + members will be used mainly for the needs of the local market against the background of the prevailing heat in Saudi Arabia and the seasonal increase in demand for electricity to operate air conditioners
Marine oil storage
Overview: Bank Leumi
On the harm to companies in the oil industry Befman added in the review “The American oil company Shell cuts its oil exploration budget by $ 600 million. Also, the fear of further harm to the companies’ profitability also hurts the suppliers of oil producers. Schlumberger, the world’s largest company that provides services to oil fields, announced cuts Of about 20% in its workforce amid fears that the second wave of Corona virus will hurt the recovery in global oil demand.
As for oil prices Befman notes that “for now, it seems that only after curbing the spread of the corona virus, in a way that will allow clear and lasting relief for major oil consumers – aviation and transportation – can we expect prices to continue rising relatively steadily. Looking to the end of 2020, futures expect only moderate price increases. $ 44 per barrel BRENT and the price of a WTI barrel is expected to remain stable at around $ 41 per barrel, however, against these estimates from futures contracts, there appears to be a real concern that during the remaining period until the end of 2020, with emphasis on expiration of WTI contracts in the next two months The fall in oil prices is renewed, as the signs of worsening virus status continue to increase.
“In the longer termOnly after the world recovers from the ongoing corona crisis, are there factors that will support oil demand, including: Renewal of US economy growth after halting the spread of the corona virus and the implementation of IMO 2020 regulations that will increase demand for sulfur-poor distillates, . ”
On The oil shale industry “With the rise in oil prices, oil shale companies are beginning to show signs of returning to the market due to the rising profitability of some oil shale companies at existing sites. However, the level of production viability in the US, at current oil prices, is still too low for opening sites. New. The oil companies usually operate with very high leverage in the US and Canada. According to the consulting firm Deloitte, about a third of the American oil shale companies are in danger of insolvency at an oil price of $ 35 per barrel.
“Amid fears of further damage to the oil market that could severely hurt US production companies, US banks have decided to limit their exposure to projects in the oil shale sector.OCCThe US has announced that it is considering the decision of a number of large banks to limit funding for projects in the US oil drilling sector.
Befman also refers For rising natural gas prices “According to an EIA report, the US natural gas inventory rose and reached a level of 3.241 trillion cubic feet on 24/7/20. The increase in inventory came against the background of weak demand for natural gas and it is likely that inventory is expected to rise further against the background of low demand levels.
“The rise in the price of natural gas comes against the background of a certain recovery in the US economy from the lows of April which is expected to increase the demand of end consumers in the future, which may also increase the demand for natural gas if the economic recovery continues.
Natural gas inventory
Source: Bank Leumi Overview