Risks of declining oil prices intensify

Earlier this week, oil prices manage to realize growth above $ 43. In our opinion, in the short term, upward movements in oil may continue, however, on the horizon of the next two months, the risks of correction to levels of $ 40 and below will increase.

Currently, the following factors are in favor of rising oil prices. Firstly, the fears of the second wave of the pandemic have not yet taken markets out of the risk-on zone.

Maintaining optimistic investor sentiment, supported by the constant actions of world central banks to fill the markets with liquidity, allows many groups of risky assets, including oil, to demonstrate growth.

Secondly, markets receive positive signals from the global industry, which continues to demonstrate a gradual recovery process. In our opinion, the largest contribution to the growth of market optimism in this plane is made by the data on the Chinese economy, where the recovery is more stable.

Hopes for an accelerated recovery in the global economy and industry translate into corresponding expectations for a recovery in global oil demand, which also supports quotes.

Thirdly, we see that the countries participating in the OPEC + transaction are committed to increasing the level of discipline in the implementation of the relevant quotas to reduce oil production. We also note that production in many regions of the world remains under various pressure factors, both geopolitical (Libya) and viral. For example, in the USA, where the growth in the number of infections continues rather actively, the recovery of drilling activity may take longer, which also favors the current balancing of the oil market.

As a result of these factors, oil in the coming weeks may continue to grow to levels of $ 44−47. As for the longer term, the second half of summer – early autumn, then, according to our estimates, the risks of oil returning to $ 40 during this period remain.

On the one hand, hopes for a confident recovery in global oil demand now have no solid foundation. Regarding the pace of global economic recovery, a high level of uncertainty still remains – investors currently prefer to ignore this factor. Nevertheless, we see that the anxiety of market participants about the second wave of the pandemic is gradually increasing. In the event that these concerns again come to the fore, market optimism may show a rapid decline, which will lead to a correction in oil.

On the other hand, during July, during which the OPEC + countries will maintain production levels at a reduced level, the oil market may not have time to balance sufficiently. In the event that the United States returns to the restoration of drilling activity in the coming month, the US oil supply may also return to growth in August, increasing pressure on the balance of the oil market.

As a result, in the medium term 2-3 months, the main risks for oil are the insufficiently high rates of recovery in the global economy and global demand, as well as the risks of a return to the growth of American oil production. We maintain our forecast and expect that oil prices will form near the $ 40 levels by the end of the year.