Geopolitical Influences Pause Global Oil Rally | KOSEC

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Geopolitical Influences Pause Global Oil Rally

Caroline Wong

Caroline Wong is a Research Analyst at KOSEC - Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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The global oil rally has paused due to a combination of Russia reporting that it could begin scaling back production cuts from July, as well as continuing tensions between China and the United States. U.S. futures slipped 0.6% on this news after rising 3.3% on May 26th, 2020. Russia has surpassed Saudi Arabia as the largest oil exporter to China by an average of 1.75 million barrels per day, in comparison to Saudi Arabia’s 1.26 million barrels per day. Iraq has slid into second place with Saudi Arabia being the third-largest oil exporter. Saudi Arabia’s loss of market share to Russia is likely to only be temporary, according to analysts.

Russia’s motives are proposed to be aligned with terms outlined in the OPEC+ deal that originated earlier in 2020. During May and June, the OPEC+ group pledged to restrict oil production to 9.7 million barrels per day, before easing the cuts to 7.7 million barrels per day between July and December. Russia pledged that it would cut its production by 19% to 8.5 million barrels per day.

Russia perceives there to be greater demand for oil as global economies begin to open back up, hence floating the idea of increasing production of oil from July. The spokesman of the Russian President, Vladimir Putin, said that discussions will be made with OPEC+ before a decision is made to increase production. Russia’s Energy Minister reports that there is a current global oil surplus of between 7 to 12 million barrels per day. Supply and demand levels are likely to be balanced out by July as economies reopen.

As China is the largest importer of crude oil in the world, countries have been competing to be the largest exporter to China. Tensions between Beijing and Washington have made China less interested in importing oil from the United States, consequently creating a void that other countries are now trying to fill. China’s oil imports were higher in April than in March, which signifies that there may be a stable recovery in oil supply. The United States is considering a range of sanctions that they could enforce on China to punish them for their unpopular crackdown on Hong Kong. As a result, restricted business activities that could become of this could see a decrease in oil demand.

Interestingly, Algeria and Nigeria, both OPEC countries, have raised their oil prices which signifies that they believe that their customers are willing to pay more for oil. This action is a big relief considering the COVID-19 pandemic has destroyed demand levels. Easing of lockdowns this month has seen oil rise approximately 80% after prices fell below zero for the first time in history. Fortunately, the oil futures curve is also flattening, which is a sign that supplies are reducing.

By Caroline Wong 

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