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09.07.202013:48 Forex Analysis & Reviews: It gets harder to mitigate oil production

Long-term review

Exchange Rates 09.07.2020 analysis

The coronavirus pandemic brought down oil prices. In April, prices fell to $23.3 per barrel. This is the lowest level logged in 2020. However, in May, Brent crude rose to $39.9 per barrel. Nevertheless, it is too early to talk about stability in the oil market.

Oil demand recovery was expected to happen faster. However, in April, the EIA predicted that in the second quarter, global oil consumption would decrease by 12% compared to the previous year, and in the third and fourth quarters - by 3% and 0.4% respectively. Then, in June, the EIA lowered its estimates of a decline to 17%, 7% and, 4%, respectively.

According to the IHS Markit forecast, the global GDP growth will occur only in the first quarter of 2021. Thus, demand will revive only in the third quarter of 2021 due to the global economic recovery.

However, an increase in the number of COVID-19 cases may lead to a new lockdown. In this case, the second wave of pandemic could easily reduce global economic growth to naught.

The countries' authorities were trying to avoid a global outbreak by closing the regions and municipalities. Thus, in Germany, Gutersloh district is closed as well as Texas and Florida in the USA. In these regions, gyms, museums and cinemas, bars and restaurants are shut down again. As the number of new cases in the United States is advancing every day, it is possible that other states may face the same problem.

Investors and traders are indignant because a renewed lockdown could return uncertainty and instability to the market.

A decline in global demand by 29 million barrels per day on a yearly basis forced the OPEC countries to come to a new agreement, the terms of which seem unrealistic.

Russia would have to reduce production in the second half of 2020 by 40.4 million tons. Russian oil companies will hardly accept these conditions.

Also, Iraq may fail to meet the new terms as in May, it fulfilled only 40% of its obligations. And Mexico, completely refused to sign the new deal. Other OPEC members may also take such a decision.

According to Refinitiv, from April to May, oil exports from Saudi Arabia fell by 31% and exports from OPEC countries declined by 21%. At the same time, in the US, exports grew by 3.5% compared to April. This has raised a question of the deal's feasibility. Moreover, uncertainties cause anxiety about a return to normal life.

Kate Smirnova,
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