The recovery and maintenance of demand, in particular in the United States and China, will be crucial for a return to normal oil markets when prices for the main options – STI and Brent – return to acceptable levels, according to analysts.
On Monday, for the first time in history, STI hit a negative level and closed at $37.63 a barrel, suggesting that production exceeded the possibility of storing additional quantities, at least in the short term. On Tuesday, however, prices partially recovered.
The only negative conclusion is for the May contract, which was concluded on 21 May. April is coming to an end, while the June contract is still positive at around $20 a barrel, suggesting that this is a very short-term problem at the moment.
The June contract runs until 19 June. May and is the best representation of the real oil market. This will therefore be corrected, but the fall in crude oil prices is a symptom of a deep malaise caused by the IMF, i.e. a recession. With negative overall growth expected, demand for everything will be weak or even declining, including crude oil, said Madan Sabnavis, chief economist for CARE’s ratings.
On a slippery slope?
Nevertheless, analysts remain cautious on their way to the oil market, as most of the world’s economies have stalled after the rapid spread of the coronavirus pandemic (Covid-19).
It remains to be seen whether the June contract will be as negative as it is approaching the end of May. To date, the U.S. government has not announced that it will change its policy without imposing mandatory production cuts on its oil producers, and continues to take an approach that allows natural depletion to reduce reserves, said Yaw Yan Chong, director of research and development at Refining Oil.
Meanwhile, crude oil production is estimated to have fallen by around 700,000 barrels per day (bpd) by mid-April, and a further fall of around 1.7 to 2 million bpd is expected by the end of 2020.
It remains to be seen whether the drop in production will be sufficient to stop the fall in prices, Chong added.
Back to normality.
Analysts at BofA Securities, on the other hand, suspect that WTI has recently traded at a premium in almost all North American crude oil, even USGC barrels. According to them, the return to a normal price will depend on the loss of supply, storage restrictions and the resumption of demand from refineries.
We expect crude oil supply in the US to decline by approximately 1.4 MMbpd from the fourth quarter of 2019. (4-2019) à (4-2020). When refining volumes return to more normal levels, the markets of the Cushing and the American Gulf States (USGC) are likely to be much tighter, resulting in narrower spreads than for Brent and lower crude oil exports in the United States. If North American supply losses turn out to be greater than expected, USGC and potentially hot barrels could trade at a higher price than Brent, wrote Warren Russell, a commodities strategist at BofA Securities who recently co-authored the article.
Lower demand for Covid-19 increased their expected surplus to 12 million barrels per day in the second quarter of 2020. (2-2020) and to 4.9 million barrels per day throughout the year, although OPEC+ has agreed to reduce production by 9.7 million barrels per day. We expect global demand to fall by around 9.2 million barrels a day this year, as COVID-19 affects global consumption, particularly in the transport sector, Russell wrote.