Oil Balances On The Verge Of Another Sell-Off

Oil Traders Try To Evaluate Impact From Coronavirus-Related Measures And Store Oil In Tankers

The news flow is very heavy nowadays for oil traders who get updates on new measures to combat coronavirus almost every hour. There are two main uncertainties right now – the scope of the containment measures and the length of the crisis.

Unfortunately, the first estimates are not reassuring since even the optimistic U.S. President Donald Trump voiced an opinion that the current crisis could drag on until August.

Meanwhile, tanker rates for very large crude carriers (VLCC) have surged as oil traders try to store cheap oil in hopes that they can later sell it at a profit when the market recovers. The demand for VLCC storage is the near-term positive factor but the supply of VLCCs is not unlimited. Once traders contract all available tankers, further downside should be expected as this additional demand for oil will cease to exist.

When oil visited the sub-$30 territory back at the beginning of 2016, the crisis did not last long and oil prices rebounded in a quick fashion, allowing traders who contracted oil tankers to sell their oil at a material profit. However, the current situation looks different since the coronavirus-related measures are just being implemented and they have yet to present their full impact on the oil demand.

Theoretically, oil traders can get caught in losing positions with their tanker oil, and their pain will be exacerbated by the necessity to pay fees to the VLCC owner. In such a scenario, these traders may be forced to unload their oil during the market sell-off, making things even worse.

Oil Battles To Stay Above $28

Currently, oil prices are supported mostly by bargain hunters since the recent news suggest that oil demand will decline even further at a time when Russia and Saudi Arabia are ready to increase production in their battle for market share.

In my opinion, the fundamental situation for oil remains very challenging even at current low levels. Typically, cheap energy leads to increased energy consumption, which in turn leads to higher energy prices as demand increases and reaches balance with supply.

However, the current situation is very different from this traditional scenario because the coronavirus containment measures lead to an additional artificial decrease of demand. Current data on these measures suggests that this problem will not be resolved anytime soon.