Oil Gets Little Relief From Unlimited QE ProgramFor oil, the situation with real demand is more important than Fed’s asset buying programs.
The Announcement Of Unlimited QE Program Fails To Boost Oil Prices
As I wrote earlier, the U.S. Federal Reserve has announced an expansion of its quantitative easing program, promising to buy assets as long as it deems necessary. This news is a positive catalyst for most asset classes since more money would be pumped into the financial system.
However, oil has so far failed to get into the positive territory today despite this major positive news. The problem for oil is that despite heavy electronic trading, it is still a physical product that needs to be either consumed or stored.
In my opinion, the potential problems with oil storage in the future are serving as an increasingly important catalyst for oil prices. Previously, Goldman Sachs and Rystad Energy estimated that oil demand may be hit by 8 million – 10 million bbl/day by late March.
As new coronavirus containment measures are announced every day, the estimates for future oil demand will likely continue to be revised to the downside. Each day that supply exceeds demand, the excessive oil has to be stored somewhere.
Rystad Energy has recently estimated that 76% of the world’s oil storage capacity is already full and that oil stock builds at 6 million bbl/day should lead to full use of the capacity in several months due to various operational constraints.
Oil Traders Will Have To Track Coronavirus Closely To Estimate Damage To Demand
In current circumstances, oil traders have no option but to watch the spread of COVID-19 closely to estimate future containment measures and the subsequent hit to oil demand.
At this point, the situation continues to worsen, as the number of coronavirus cases in the U.S. got a major boost during the weekend, and further containment measures may be implemented to stop the spread of the virus.
It remains to be seen whether financial measures like unlimited QE could calm the markets, but it looks like oil prices will remain very sensitive to coronavirus-related news for the foreseable future as no financial magic can offset the negative impact from poor demand in real life.
The current trends in the coronavirus spread are negative and promise more containment measures in the future, so the oil price trend remains negative as well. In my opinion, it will be very hard for oil prices to have any sustainable upside without any stabilization on the virus front.