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Uncertainty Daunts OPEC As Crude Oil Prices Remain Sluggish

Author: Veeresh Hiremath/Wednesday, October 28, 2020/Categories: Exclusive

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Uncertainty Daunts OPEC As Crude Oil Prices Remain Sluggish

The global oil market has been oscillating in the price band of $35 - $44 per barrel for WTI and $37 - $47/bbl for Brent after witnessing a negative closing in April. An outbreak of pandemic coronavirus across the globe, which had resulted into imposition of lockdown to curtail the spreading has dampened the demand for the oil across the globe. The summer driving season in the United States, which sees largest product consumption, was lull in the current season. Restrictions on vehicular movement have affected the demand for gasoline and distillate badly across the globe.

International Monetary Fund (IMF) had projected a positive economic growth in its World Economic Outlook report released in January with global growth forecast to grow by 3.3 per cent, while developed and emerging economies grow by 1.6 per cent and 4.4 per cent respectively. These growth forecasts were lowered and turned into negative growth projection in subsequent World Economic Outlook reports released in April, June and October. IMF is very optimistic that the global growth will turn into positive in 2021 and considering the present situation of coronavirus impact, government and central banks efforts to push economy, it is forecast that the global growth will remain negative at least in first half of 2021. 

Falling demand due to lesser vehicular movement due to lockdown across the globe has resulted into a drop in the oil prices. Fall in oil prices prompted the major producer i.e., OPEC and Russia to work out strategies to balance out the global oil market. In order to keep the global oil prices stable, the OPEC along with Russia decided to cut the production by 7.7 million barrels per day at the beginning of the year. This production cut is extended till December 2020 and the cartel might increase the production cut in 2021 also if the situation warrants. While deciding on production cut, few OPEC members were exempted from the cut. Especially, Iran, Libya and Nigeria are pumping more oil into the reserve.

On one hand, the global oil demand is falling and OPEC+ is adhering to production cut to balance out the global oil market. However, on the other hand, the United States is producing more oil to maintain strategic reserve. In view of varying supply demand factors and the demand situation remaining gloomy, the global oil market is taking a hit badly in terms of price movement.

The writer is head (commodity & currency research), at Karvy Comtrade Ltd

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