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Oil Fails To Continue The Rebound As Future Demand Numbers Are Under Question

By:
Vladimir Zernov
Published: Mar 20, 2020, 14:44 UTC

U.S. will try to support the oil market to save its shale oil industry, but only positive changes in oil demand outlook can provide long-lasting support for oil prices.

Crude Oil

Oil prices have recently had a huge rebound thanks to two catalysts. First, bargain hunters stepped in to purchase cheap oil in a bet that the sell-off has gone too far too fast. Second, U.S. President Donald Trump hinted that he may do something about the ongoing price war between Russia and Saudi Arabia.

The media reports suggested that U.S. may use diplomatic pressure on Saudi Arabia and threaten Russia with new sanctions to bring them back to the negotiation table.

If the U.S. makes such moves, they will come as an additional support for the oil market following the country’s decision to buy 30 million barrels of oil for its strategic reserve.

While both the purchases of oil for U.S. strategic reserve and the possible pressure on Russia and Saudi Arabai are supportive factors for oil, the main piece of the oil puzzle is the oil demand for the coming months.

Estimates just keep getting worse. Previously, I’ve written that Goldman Sachs estimated that demand for oil may fall by 8 million bbl/day in late March. A recent COVID-19 report by Rystad Energy suggests that global oil demand could decrease by 10 million bbl/day in April compared to last year, and also adds that the recovery may be slow.

It’s easy to believe is such forecasts given the news we get on a daily basis. California has recently issued a statewide ‘stay at home’ order – that’s another hit to energy demand in a state that would rank as the world’s fifth economy if it was an independent country.

In addition to visible hits to demand that are coming with the implemented virus containment measures, there’s huge uncertainty regarding the length of such measures.

Some projections are very grim. For example, the UK Scientific Advisory Group for Emergencies stated that the government may have to be alternating between periods of more and less strict social distancing, and that such policies will have to be in place for at least most of a year.

Such scenarios are the main danger for oil demand and oil prices in the longer term. In the short-term, we are guaranteed to witness plenty of volatility, with brutal sell-offs and mighty rebounds.

About the Author

Vladimir is an independent trader and analyst with over 10 years of experience in the financial markets. He is a specialist in stocks, futures, Forex, indices, and commodities areas using long-term positional trading and swing trading.

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