The outcome of US presidential elections, the possible return of crude supply from Libya and a resurgence in shale production backed by more stable, higher prices could dominate the oil market landscape in the near term.
North African producer Libya, whose barrels remained off the markets this year due to a force majeure, is likely to add to supply following a ceasefire declared on Friday.
"The prospect of Libya, currently producing less than 100,000 bpd, now being able to increase production would add further delays to the rebalancing process [of oil demand] and it helped to explain the weakness seen in oil prices ahead of the weekend,” said Ole Hansen, head of commodity strategy at Saxo Bank.
International benchmark Brent settled 1.22 per cent lower at $44.35 per barrel on Friday, while US gauge West Texas Intermediate closed 1.12 per cent lower at $42.34 per barrel.
Demand for oil dropped in the first half of this year as movement restrictions were put in place to control the spread of the coronavirus.
Opec+, the producer group headed by Saudi Arabia and Russia, responded to a record decline in demand in April by cutting back 9.7 million barrels per day from the market between May and July, with tapered restrictions of 7.7m bpd in place from August onwards.
The group urged tighter compliance to output restrictions at a joint ministerial monitoring committee meeting last week and is increasing pressure on countries such as Iraq, Kazakhstan, Nigeria and Angola to fully comply with the pact.
Christophe Ruhl, senior research scholar of international and public affairs at Columbia University, said the return of both Libyan and Iranian barrels to the market could lead to a supply glut in the longer term, with Tehran likely to bring its exports back to the market in the event of a change in administration in the US.
The current administration led by US president Donald Trump, has undertaken a 'maximum pressure' campaign that has taken more than one million bpd of Iran’s exports off the markets. It has also threatened Iran with ‘snapback’ sanctions that are likely to further choke Tehran’s ability to earn any oil revenues.
Iran is said to have exported only 250,000 bpd in February, compared with an average of 1.5m bpd in 2012.
“The US elections... to me that's still more risk than anything because we don't know what the incumbent is capable of doing and how long that will stretch out and in general just underlines the poor state of the US political society and the economy,” Mr Ruhl told a Gulf Intelligence webinar on Sunday.
He dismissed the possibility of a second round of global lockdowns in the event of another wave of Covid-19 infections. Globally, the coronavirus has infected more than 23.4 million people as of Sunday, according to Worldometer, which tracks the pandemic. About 809,094 people have died as a result of Covid-19, with a fifth of the fatalities registered in the US. The virus has also dented the consumption of crude in key demand centres such as Brazil, India, Russia and South Africa, which rank after the US in terms of the number of infections worldwide.
"There will be no second lockdown like what we've seen before. Nobody can afford it, nobody wants it,” said Mr Ruhl.
Lower prices of crude “are preferred” in the current environment to support a global economic recovery, he said.
However, more stable prices are also likely to lead to a resurgence in US shale production, which is likely to cap any further gains in prices. Oil has remained steady at five-month highs as Opec+ maintained curbs and demand picked up as movement restrictions eased.
"At prices that we have today, shale can sustain a reasonable level of production. Productivity is still going up, so the break even price is still going down over time,” said Mr Ruhl.