Crude oil and related oil ETFs are slipping on Friday as oil producers like Iraq, Russia, and the UAE are lowering their crude oil prices to make it attractive to buyers as demand from Asian remains is tepid, Bloomberg reports, according to crude traders.
West Texas Intermediate crude prices fell earlier in the session but have since recovered slightly, up 0.46% to $41.26 as of 230PM EST.
The United States Oil Fund LP (USO) and the Energy Select Sector SPDR ETF (XLE) are both off more than 0.35% however Friday.
The most recent situation is related to two cargoes of Iraqi Basra Light, which BP and China National United Oil Corp. which had to sell at considerable discounts with buyers unwilling to pay up. Before that, Russia and UAE crude cargos had to be discounted to find buyers.
This could be concerning for oil because most recent reports about China and crude have been positive. But now other reports have started to surface, suggesting that the thirst of the world’s largest oil importer for crude may be declining, after stockpiling historically low crude since the early days of the pandemic.
Crude tanker freight rates, which have fallen dramatically across most routes due to weak trade, are also not likely to bounce back anytime soon unless there is a massive correction in vessel supply, according to analyst Drewry.
“Although recovery in global economic activity will lead to some improvement in oil demand in 2H20, oil consumption at the end of 2020 is still likely to be 3.7% lower than in the same period of 2019. The bearish outlook does not end here, as demand in 2021 is forecast to be about 2.5% lower than the 2019 level. As such, weak demand and inventory overhang from 2020 will prevent crude oil trade in 2021 reaching anywhere close to the 2019 level,” wrote Rajesh Verma, lead analyst for tanker shipping at Drewry.
According to the US Energy Information Administration (EIA), US crude oil production will decline from 12.2m barrels per day (bpd) in 2019 to 11.7m bpd in 2020 and 11m bpd in 2021. Middle Eastern crude is projected to increase its percentage in Asia, which could result in lower demand for crude tankers in 2021 compared to 2019.
“While tonne-mile demand will take more than two years to recover to 2019 levels, supply will keep inflating, notwithstanding the weak order book. The crude tanker fleet has already increased by about 7m dwt (1.7%) since the end of 2019. Another 31m dwt (7.5% of end 2019 fleet) is scheduled for delivery between 2H20 and 2022, with further ordering likely for this period,” Verma said.
“Thus, for rates to recover, significant scrapping will be required over the next two to three years. Until recently high freight rates and lack of pressure of compliance with IMO 2020 because of low bunker prices kept demolition low, but with the increase in oversupply and corresponding weakness in rates, scrapping activity is forecast to pick-up. That said, the pace of scrapping will thus decide how quickly the crude tanker market recovers,” he said.
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