What next for the oil market? Speculative commitment the highest for years

The first half of 2020 was a particularly turbulent period for financial markets. At that time, quotations were subject to gigantic volatility oil. Not only did the pandemic reduce the demand for fuels by about 1/3, but also the mining countries - led by Saudi Arabia and Russia - started a price war that lasted for several weeks, which further aggravated the decline in raw material prices. The situation has calmed down, but fears of a second wave of the pandemic do not favor it. Refineries are reviewing crude oil purchase contracts to ensure continuity of supplies. Does this mean that the difficult time for the oil market is over?

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Production in OPEC plus countries has been significantly reduced, and the production of raw material in the United States is starting to decline due to market trends. It is not able - even with the growth in demand along with the multiplication of economies - to stop the decline in inventory growth in the United States.

- We believe that the first growth potential in crude oil prices has not been exhausted. The volatility on the raw material market will still remain high, while the possibility of a drastic and sharp increase in prices has, in our opinion, been very exhausted - ocenia Bartosz Sawicki, head of the Analysis Department at TMS Brokers.

Oil production is falling

It turns out, however, that even such a strong limitation of mining activity does not immediately translate into production. Adits that operate all the time are those that are responsible for the vast majority of American mining. In recent weeks, oil production in the United States has decreased significantly. In mid-March, it even exceeded 13 million barrels per day, and in the first half of June it fell - compared to these levels - by approximately 2 million barrels per day.

- This process will be progressive, but it will be a process spread over time. The recent very strong rise in oil prices will not favor the decline in production in the United States dramatically. It seems unlikely that the United States and American producers would be able to permanently reduce their level of production to below 10 million barrels per day - judges Sawicki.

Therefore, we are beginning to develop a picture of the market that should be better balanced than at the beginning of the second quarter and not only due to the increase in demand for oil along with frostbite of economies, but also due to a clear decline in production in countries OPEC +, and in the United States and other leading manufacturers.

Even such a strong reduction in production cannot prevent the continuation of inventory increases. When we look at the level of inventories in the United States, it turns out that they are (after taking into account strategic reserves) the highest in history.

- This shows that the oversupply on the crude oil market is very strong and it can therefore be argued that investors reacted quite well in advance and with quite far-reaching optimism to the fundamental trends on the crude oil market. In mid-June, risk aversion is clearly growing and some investors are becoming more afraid of the second wave of the pandemic or the depth of the recession caused by Covid-19. This can cool down the enthusiasm of those who bought oil quite a bit - says Sawicki.

Speculative involvement on the oil market is the highest for several years.

- On the one hand, such extreme positioning limits the potential for further increases in oil prices, and on the other hand, it also means that if the improvement in the fundamentals is not as fast as in the price, it may create a risk of a deepening of the correction - judges Sawicki.