Oil Price Fundamental Outlook Mired by Great Lockdown

Crude Oil Price Talking Points

The price of oil recovers from the collapse in the May futures contract, but the economic shock from COVID-19 may continue to drag on crude as the Great Lockdown disrupts global demand, with the oil surplus raising the cost of storage.

Fundamental Forecast for Crude Oil: Bearish

The fundamental outlook for crude remains bearish even though the Organization of the Petroleum Exporting Countries (OPEC) plan to reduce oil production by another 10M b/d starting in May as the Great Lockdown disrupts global demand.

The International Energy Agency’s most recent monthly report warns “global oil demand is expected to fall by a record 9.3 mb/d year-on-year in 2020,” with the group going onto say that “there is no feasible agreement that could cut supply by enough to offset such near-term demand losses.

The IEA points out that “floating storage is becoming more expensive as traders compete for ships,” and the price of oil may continue to exhibit a bearish behavior as the group emphasizes that “never before has the oil industry come this close to testing its logistics capacity to the limit.

OPEC Oil Report

Source: OPEC

OPEC’s Monthly Oil Market Report (MOMR) strikes a similar tone as the “world oil demandgrowth forecast is revised lower by 6.9 mb/d, to ahistorical drop of around 6.8 mb/d,” with the update noting “the tanker market has been one of few segments of the oil industry that enjoyed positive momentum in March” as the response to COVID-19 triggered “a significant crude surplus.”

In turn, “2020 isexpected to post negative oil demand, with furtherroom to the downside, should current conditionscontinue to worsen during the remainder of the year,” and OPEC and its allies may come under pressure to further support oil prices as “downward risks remain significant, suggesting possibility of further adjustments.”

EIA field production report

Source: US EIA

With that said, remains to be seen if the recent slowdown in US crude output will help to rebalance the energy market as weekly field production continues to fall back from a record high (13,100K), with output narrowing to 12,200K from 12,300K in the week ending April 10.

Looking ahead, the Great Lockdown may continue to drag on energy prices as the crude surplus inflates the cost of storage, and the price of oil may exhibit a bearish behavior throughout the first half of 2020 amid the growing number of COVID-19 cases in the US and Europe.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.