An crude oil pump jack on a drill pad in the Permian Basin, Texas, November 2019. Image: Facebook

Oil markets are responding positively to Thursday’s OPEC+ technical meeting, even though the group of oil exporters failed to agree to a sustained reduction of production to curb a persistent oversupply of the fuel.

Though the club did not decide, at least not yet, to continue its 9.7 million barrel per day (bpd) oil production cut into August, it did indicate that there is a strong 87% compliance rate with the current deal reached in April. But more work still needs to be done to get all members to adhere to the agreement’s production-cutting terms.

The bad boys of the club, including Iraq and Kazakhstan, were called on the carpet for their lack of compliance to the set quotas, but both pledged to more closely adhere to output cuts going forward.

The original OPEC+ deal, reached amid the worst oil demand destruction in history due to the Covid-19 pandemic, called for cuts of 9.7 million bpd for both May and June, then dropping to 8 million bpd for the rest of the year. Last month, the group extended the 9.7 million bpd production cut into July.

Yet, just a glimpse in the rearview mirror back to earlier this year, when oil production heavyweights Russia and Saudi Arabia engaged in an ill-timed and market-damaging price war, shows just how fragile OPEC+ consensus can be.

For now, a resumption of price war and the dynamics that created it does not appear to be on the cards. Global oil benchmark Brent crude was up 1.3% in afternoon trading in Asia on Friday, hitting the US$42.06 per barrel price point, while US oil benchmark West Texas Intermediate (WTI) crude was up 1.42%, at $39.39 per barrel.

Oil prices have recovered after collapsing due to the double whammy of the Covid-19 pandemic and a massive supply overhang. Photo: Facebook

Yet, storm clouds are still gathering over oil markets. A second wave of the Covid-19 pandemic could send the carefully orchestrated oil micro-management cards crumpling again as it did in April, when around one-third of global demand was removed from the market as economies worldwide shut down and oil prices hit record lows.

Fresh outbreaks this week in China, notably in the capital of Beijing, is a particular cause for concern. China, the world’s largest crude oil user, has seen its oil demand remain one of the few bright spots for markets over the last few months amid otherwise anemic oil demand.

In May, China’s oil imports jumped to a record high of 11.34 million bpd, up an impressive 19% year on year, General Administration of Customs data shows. Fresh Covid-19 outbreaks in Beijing and elsewhere in the Middle Kingdom, however, could zap demand again and put extra downward pressure on prices, just as they are struggling to find a floor.

Record high Covid-19 outbreaks in the US, the world’s largest oil producer and second-largest crude oil consumer, are also being reported in six key states. Arizona, Florida, Texas, Oregon and Oklahoma all reported their most ever new daily cases on Tuesday after all-time highs last week and as they continued to reopen their economies after lockdowns.

Nevada also reported its highest single-day tally of new cases on Tuesday, up from a previous high on May 23. Nineteen other states have seen Covid-19 cases rise since re-opening in May. The pandemic has killed more than 120,000 Americans in less than four months.

New outbreaks and any reclosing of major population centers in the US, though politically unpopular and even harder to enforce, would cause transportation fuel usage to plunge again and consequently more oil inventory fill-ups.

An American oil worker at the Permian Basin in Midland, Texas, United States, on May 1, 2018. Photo: AFP Forum via Getty Images/Benjamin Lowy

The country is still battling high oil storage levels due to demand destruction, mostly coming from the transportation sector. Last week, US crude inventories rose to a record high for a second straight week, climbing to 538 million barrels.

However, distillate stockpiles actually fell following several weeks of significant builds as refiners continued to blend jet fuel into their distillate pool, US government data shows.

On the supply side, US production keeps declining due to both forced production shut-ins and planned oil production trimming by several key shale oil players that are trying to prop up prices. Production slipped by a whopping 600,000 bpd to 10.5 million bpd, its lowest level since March 2018, US Energy Information Administration (EIA) figures show.

Earlier this year, US oil production set a record high of 13.1 million bpd. Going forward, unless more production is resuscitated, the US will likely slip back to the second global producer slot after Russia and possibly even third after Saudi Arabia.

New Covid-19 outbreaks have also been reported in several other countries, including Brazil and Germany, where two housing complexes have been placed under quarantine while hundreds of workers at a slaughterhouse were infected.

The North Atlantic Treaty Organization (NATO), for its part, said yesterday that it has prepared a contingency plan for a potential second Covid-19 wave.

The danger for oil markets remains since it appears the possibility of a second Covid-19 wave hasn’t been factored into prices yet, not to mention more downward pressure if lockdowns resume and economic activity starts to fall off a cliff as it did from March to May.

Motorists are screened for Covid-19 infection at a ‘drive-thru’ facility offered by KPJ Damansara Specialist Hospital in Petaling Jaya on March 28, 2020. Photo: AFP via NurPhoto/ Aizuddin Saad

In a sign that shows just how far oil markets have to go before they return to health, Japan (the world’s third-largest economy and fourth-largest crude importer) has seen its oil import levels tank to nearly three-decade lows.

The country took in just 1.92 million bpd last month, a market-damaging drop of 36% from the same period a year earlier and the lowest mark since 1991, preliminary government data shows.

Japan’s liquified natural gas (LNG) imports are also plunging on weaker demand. The country, the global LNG import leader, took in some 4.5 million tons of LNG last month, a drop of 18.9% year on year.

That decline comes despite a record plunge in Asian LNG spot prices so far this year to around US$2 per million British thermal units (MMBtu), well below producers’ breakeven points. It also puts the cost of the fuel even lower than coal, a decades-old (but dirtier burning) favorite among power producers in Asia.

On the other side of the oil equation, the world’s largest crude exporter and OPEC de facto leader Saudi Arabia has just idled two offshore drilling rigs.

State-run super-major Saudi Aramco, the largest oil-producing company in the world, made a rare move this week by suspending work at two offshore oil platforms for at least a year, news reports said on Thursday, citing filings from the contractors.

The oil giant is also reportedly delaying an $18 billion oil and natural gas expansion project by at least six months. The offshore oil projects were supposed to help offset conventional drilling in the kingdom, which makes up the bulk of its oil production.

The postponement of the two rigs, however, merely reflects the dangers still facing oil markets as major economies not only try to sustain reopenings after crippling shutdowns, but the ever-present and worrisome possibility that a second wave of the Covid-19 pandemic is already underway.