Oil Pulls Back As U.S. – China Relations Return Into Spotlight

Oil Video 27.05.20.

China’s Oil Demand Is Set To Grow By 16.3% In The Second Quarter

Oil pulls back from recent highs as U.S. – China tensions impact the mood of oil traders.

As I mentioned earlier, the deterioration of  U.S. – China relations was an important factor for oil as the continuation of a trade war between the two biggest economies was a bearish catalyst for oil demand.

According to Wood Mackenzie analysis, China’s oil demand will recover to 13 million barrels per day (bpd) in the second quarter of 2020, up 16.3% from the first quarter.

However, the country’s demand will still be lower by 2.5% compared to the second quarter of 2019. Wood Mackenzie also noted that jet fuel demand will remain weak due to restrictions on international flights.

The potential U.S. sanctions on China related to new legislation in Hong Kong create another layer of uncertainty. If such sanctions are implemented, China’s economic activity may suffer a blow, putting pressure on oil demand.

Russia Discusses Possibility Of Implementing Current Production Cuts For Two More Months

According to Interfax, Russian Energy Minister Alexander Novak and Russian oil companies have discussed the potential to implement current production cuts until the end of summer.

Strict compliance with quotas on the Russian side was a positive surprise for the market after the OPEC+ deal. Now that such cuts were implemented, it will be easier to maintain them for two more months.

The original deal implies that OPEC+ production should decrease by 9.7 million bpd in May – June, and then decrease by 7.7 million bpd until the end of the year. OPEC+ is scheduled to meet on June 10 to evaluate further actions.

The key intrigue is whether the group will decide to maintain existing production cuts in order to work through the excess oil inventories and provide additional support to oil prices.

Russia is one of the two biggest contributors to the production cut deal. Unlike Saudi Arabia, Russia faces significant technological challenges when adjusting production in a quick fashion – some wells may be permanently damaged.

In this light, Russia’s discussions about the continuation of the current production cuts are a positive signal for the oil market.

It remains to be seen whether OPEC+ will ultimately agree to change the original production cut schedule, but it looks like member countries are very concerned about the potential oil price collapse in case they do not provide sufficient support to the market as it tries to recover from the coronavirus crisis.

For a look at all of today’s economic events, check out our economic calendar.