Rystad Energy’s daily market comment from our Senior Oil Markets Analyst Paola Rodriguez-Masiu

After registering on Tuesday the worst one-day drop since late-June, oil prices finally ticked up a bit this morning with Brent breaking back to 40+ dollar territory.

The gains today, so far below a dollar in both grades, are indeed a rectification of the massive blow the market took yesterday.

But the real overall correction is the price decline itself which started last week and continued until this morning.

The balances outlook has been tight and we have been expecting a bearish correction for a while, but in the last days it came like a blow to shock the market. 

The persistence of Covid-19 infections globally and in key oil-consuming markets in particular has been asking for a price squeeze since some time.

The market really worries and has been worrying about stalling demand, and bearish news keep emerging.

One of the latest bearish signals came yesterday from Abu Dhabi after the country announced cuts to its official selling price. Abu Dhabi followed Saudi Arabia's price cuts from Saturday and is the first trimming done to prices in about four months.

When strong Middle Eastern producers are willing to sell-off in lower prices it is normal that the global market panics and follows suit. The panic is what registered the massive losses yesterday and that is why we see the minor uptick this morning.

But make no mistake, it may take a while to see the return of 45-dollar levels that oil prices have been enjoying recently. The real correction happened and it was a bearish one.

The market is fragile and if traders have been enjoying a summer utopia, they finally woke up to the reality of the oil demand recovery’s prospects.

Our liquids balances now point to a just-balanced market that could very quickly tip over if OPEC+ members start to reduce compliance, or if fears of a worsening demand outlook become a reality.

In addition, our current balances outlook shows that the market will fall short of the titanic task of eliminating the surplus that was accumulated during the first half of the year.

As a result, inventories are expected to remain at high levels for longer, pressuring prices well into 2021.

Looking at the bigger picture, the current bearish price correction was inevitable. It is not only the demand-side of the equation that is looking increasingly worrying.

There is also the threat of supply coming back quicker than anticipated due to mounting economic pressure in OPEC+ economies, which are currently suffering from a double whammy:  lower volumes and lower prices.

This article does not necessarily reflect the opinion of the AJOT editorial board or Fleur de lis Publishing, Inc. and its owners.