Oil Loses Momentum After Recent Rally But Continues To Gain Ground

Oil Video 24.04.20.

Rystad Expects That Future Oil Supply Will Get Hit But Will It Matter Now?

Rystad Energy projects that global oil supply may fall by 6% by 2030 compared to previous expectations due to falling investments during the current coronavirus crisis.

Obviously, all oil companies are trying to cut costs as they face the unprecedented shock and uncertainty about future oil demand. In a regular crisis, low oil prices would have led to an increase in demand, improving the supply/demand balance.

However, the current crisis is unique because demand is artificially limited by government measures aimed at limiting the speed of coronavirus spread. Therefore, the duration of this measures is the most important catalyst for oil demand right now.

The oil industry has been underinvested since the oil price shock back in 2014 but so far supply kept increasing since many projects have long lead times and have only recently emerged at the market while they were approved years ago.

Ultimately, the decrease in oil investments will lead to decrease in oil supply, but this won’t happen anytime soon. While the long-term picture is bullish for oil (it’s hard not to be long-term bullish at current oil prices), the short-term situation, which dictates the current oil prices, is very challenging.

Russia Will Have Trouble Fully Participating In The Production Cut In May

Russia may find it difficult to stick to the new oil production cut deal in May since shutting down certain fields will lead to permanent damage. In this situation, smaller Russian oil companies will try to drag the process of cutting production as long as possible since they may be permanently killing their assets.

The rate of Russia’s production cut compliance in May is a big question, but it is obvious that Russia will find it hard to decrease oil production from 11.28 million barrels per day (bpd) to 8.5 million bpd on May 1.

Currently, the companies continue negotiations and craft their production cut plans, while May 1 is just a week ahead. In this light, I’d bet that it will take time for Russia to get to full compliance with the production cut deal.

In general, I wouldn’t bet that other participants of the deal will immediately comply with their production quotas, so the physical oil market will remain under huge pressure at the beginning of May.