The oil market is undergoing a seesaw moment with prices of the Brent crude oil futures fluctuating around the level of USD 20.0 per barrel. In the recent times, the oil market has seen its worst till now with prices of West Texas Intermediate (or WTI) crude falling below zero, while prices of Brent crude spot testing its all-time low of USD 15.34 per barrel (as on 22 April 2020).
However, oil prices managed to cover some of the lost ground in the past few trading sessions with the spot recovering to USD 22.37 (intraday high on 23 April 2020). The oil market or the spot is presently holding around the level of USD 20.0 per barrel, which many industry participants are considering to be a new normal for the oil market.
The commodity, just two years ago, was trading as high as USD 86.74 per barrel and was expected to reach USD 100.0 per barrel by the time Aramco IPO hit the marketplace. However, the narrative did not come true and crude oil took a sharp turn.
So, What Changed?
Since the wildfire like spread of COVID-19 emerged from China and turned into a pandemic, the global demand has experienced a massive shock of roughly 30.0 million barrels per day amid a dramatic fall in need of transportation fuel due to the lockdown spread from continent to continent.
The COVID-19 outbreak had decimated much of the global economic activity, particularly in China, which accounts for ~ 35 per cent of the global GDP, which further cascaded into a halt in air traffic, automobile traffic, which are among the largest oil-consuming sectors.
The oil dynamics is witnessing a paradigm fundamental shift, the global economy which once was synonymous to the oil, seems no longer to be the case, and as Bloomberg assesses at least sixteen out of the sample size of twenty-five global currencies are trading near their highest levels on at least 15 years against Brent crude, and most of them hold high correlation with oil.
The assessment from Bloomberg suggests that the traditional influence of oil on emerging markets is at a brim of a breakdown, reflecting that currencies are currently being driven by the economic outlook, treating oil as an idiosyncratic story rather than the conventional systematic one. For example, the Aussie dollar has tested six weeks high yesterday and is further anticipated by many subject matter experts to rise gradually as lockdown eases across the continent.
While the demand took a significant hit, the major global oil producers Saudi and Russia kept the oil price war going, leading to a supply glut, that too at the time, when oil demand was already running dry due to the adverse impact of the COVID-19 outbreak.
Why lower and for longer could be the new normal?
In the status quo, the global demand has fallen as much as 30 per cent while the global production seems to be building further, and storage space is running out.
As per the data from Marine Traffic, there are over 206k vessels stranded along the coast due to lower oil demand, and many market participants estimate the per day stranded cost of a ship to be around USD 30,000.
So while the global demand is running low, it is becoming problematic for the oil supplier to store their oil, which was the main reason behind the fall of the U.S. oil to zero, the oil suppliers were actually paying the buyers to buy some of their oil, as storage cost for them increased substantially.
Many energy enthusiasts are currently betting the future of oil on the economy of major consumers such as China. While China has seen a slight recovery in its March activities, the red dragons are currently facing the risk of the second wave of the infection, and the future trajectory of economic activities in China would depend upon the ability of the Government to contain the risk of a second wave.
To Know More, Do Read: How Prudent is the Bet on Iron Ore Miners Over China’s Recovery? – BHP, Rio, and FMG
Apart from that, the United States has already started curtailing the domestic production with weekly production now again coming back to the level seen during the first quarter of the year 2019, i.e., around 12.0 million barrels per day.
To Know More, Do Read: The Oil Scale Back - A Bedrock for Balancing Demand and Supply Dynamics?
As we have mentioned, time-to-time, the supply should not be the major concern as we have plenty of oil to drill, what could be both dramatic and driver of oil prices is the demand side of the equation, which is forecasted by many independent agencies such as the United States Energy Information Administration to fall by 5.2 million barrel per day in 2020 from its previous year average of 100.7 million barrels.
To know more about the EAI’s forecast on both demand and supply, Do Read: EIA Trims Crude Oil Average Price Forecast, While Saudi and Russia Scheduled to Pull A Chair to the Negotiation Table
So, it is quite clear that the global supply is in abundance and demand is muted, so what is coming for oil ahead?
A large amount of monetary, liquidity and fiscal policy are being deployed to tackle the adverse impact of the COVID-19 outbreak, which seems to be working so far and countries such as China are seeing a slight recovery, which could be a booster for demand and price ahead; however, considerable risk yet prevails.
In the status quo, ABS released some positive data as well. The Consumer Price Index (or CPI), which measures the change in prices of goods and services, inched by 0.3 per cent for March 2020 quarter, which albeit, remained significantly down against the previous quarter expansion of 0.7 per cent, but remained higher than the market consensus of a 0.2 per cent expansion.
Also, as per the data from ABS, the index rose by 2.2 per cent over the twelve-month period to March 2020, slightly up against the rise of 1.8 per cent over the twelve months to the December 2019 quarter.
Thus, an array of positive data for March 2020 quarter is kicking in from various countries, which could be good news for oil in the interim, provided that the second wave of the infection along with various associated-risk remain contained.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
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