2020 August, 5, 12:13:26 PM

U.S. Oil Production Won’t Make A Comeback Under Current Prices

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Oilprice.com:- Oil prices remain stable despite rising pressure over the last week. Economic data from the United States fueled bearish sentiment despite encouraging data from the EIA. The U.S. economy is expected to have shrunk by 32.9% in Q2-2020 according to a recent statement by the head of the U.S. Federal Reserve. The expectation of sluggish demand is weighing on the economic stimulus package proposal currently debated in the US congress. Furthermore, the impact of this economic stimulus remains questionable as the number of jobless people in the United States remains considerably high.

The German economy, the largest in the eurozone, shrunk by 10.1% during the same period. The European Commission has revised down its forecast for the EU economies in 2020 from -7.4% to -8.3% while most economists are expecting a much deeper global recession this year and a slower recovery next year. These forecasts are not good news for oil demand forecasters as it means that transport fuels demand could take longer to recover than previously expected.

Currently, Brent prices are holding within the $43-45 range due to an alarming rise in COVID-19 cases globally, raising concerns of a 2nd wave and new lockdown measures. The United States death toll soared to more than 150 thousand deaths last week while Brazil and Australia set new records of deaths and infections.

Generally, we have seen prices in July much higher than their levels in June, supported by both a fuel demand recovery and increasing economic activity after major lockdown measures in April.

Brent averaged $43.44 in July, $0.44 higher than our forecast, while WTI averaged at $40.76, $2.76 above our forecast. Clearly, WTI contracts performed much better than Brent contracts. The spread between the two grades currently stands at an average of $2.65 for the month of August, compared with an average of $9.87 last April. Nonetheless, Brent and WTI 1-2 month spreads continue to be in contango which is a source of concern at a time when OPEC and its partners are set to gradually increase supply in August.

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