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Vladimir Zernov
Crude Oil

Second-Quarter Oil Surplus Will Be Huge

Just a week ago, I’ve written that oil demand forecasts were getting worse day by day, and that Goldman Sachs expected that demand will fall by 8 million bbl/day by late March due to coronavirus containment measures.

Nowadays, analysts have to adapt to incoming data on a daily basis since new virus-related measures are introduced at a fast speed. Goldman Sachs has recently provided another forecast – a surplus of 14 million bbl/day in the second quarter.

Oil trader Vitol has recently stated that oil demand could drop by 15 million – 20 million bbl/day at the peak. According to data from the U.S. Energy Information Administration (EIA), world oil production totaled 100.6 million bbl/day in 2019, while consumption was 100.75 million bbl/day.

EIA Short-Term Energy Outlook, which was published on March 11, 2020, projected that 2020 oil production will total 102.09 million bbl/day. In short, there’s a huge surplus ahead, even if Saudi Arabia and Russia do not increase their oil production in battle for market share.

In fact, any reincarnation of the OPEC+ deal will not be able to meaningfully impact oil prices in the near term. Coronavirus-related measures have dealt such a major blow to oil demand in the short-term that the damage cannot be offset by any realistic production cuts.


General Optimism In Markets Supports Oil

Most asset classes are in rally mode following the release of U.S. Initial Jobless Claims which showed that 3.3 million of Americans applied for unemployment benefits.

Traders and investors are betting that Fed’s unlimited QE program and the $2 trillion coronavirus aid package will provide support for asset prices regardless of the actual situation in the economy.

This is a bold bet, and it also provides support for the oil market. However, oil is a physical product, unlike stocks or bonds. As the time goes by and lockdown measures are implemented, the excess oil has to be stored. If the hit to oil demand will be longer-term in nature, this factor will put additional pressure on oil prices in April.

It remains to be seen whether oil prices will continue to find support near current levels if other markets stop their upside move and pull back. At this point, it looks like oil is more sensitive to actual supply/demand balance than to hopes related to unlimited money-printing, so a pause in general market upside will create additional downside risks for oil.

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