Oil Mixed As Storage Capacity Concerns Are Offset By Global Market Optimism

Vladimir Zernov
Published: Apr 28, 2020, 15:15 GMT+00:00

Oil swings between gains and losses amid uncertainty over the pace of oil demand recovery.

Crude Oil

Oil Video 28.04.20.

Is The World Economy Reopening Fast Enough To Avoid Problems With Oil Storage Capacity?

WTI oil moved higher after it fell below $11.00 earlier in the day and has currently settled above $12.00. The key topic of the day is whether the easing of virus containment measures is in time to prevent oil storage from being fully used.

In recent days, many countries have announced their preliminary plans on reopening their economies, and some have already started to implement these plans.

In each case, the reopening is a gradual process, and it remains to be seen whether oil demand will start to recover quickly. Currently, the month of May is expected to be very challenging from the demand perspective.

Equity markets continue to move higher as investors and traders believe that money-printing will lead to inflated asset values, but the money that goes into various assets has so far avoided the oil market.

Interestingly, big oil stocks continue to move up while oil contracts move down. Currently, WTI oil contracts up to February 2021 are below the $30 level, indicating that traders expect that problems will last for many months.

Russia Does Not Expect Quick Recovery

In an opinion note for a Russian journal Energy Policy, Russian Minister of Energy Alexander Novak wrote that he did not expect material oil price recovery in the near-term due to the unprecedented hit to oil demand and increasing oil inventories.

He stated that the decrease in oil demand is 20 million – 30 million barrels per day (bpd), while the recent OPEC+ deal will lead to a production decrease of 9.7 million bpd in May and June. He also noted that he expected that production cuts from non-OPEC+ producers will eliminate 5 million – 10 million bpd from the market.

I’d like to highlight the huge range of presented estimates. There’s a very big difference between an oil demand decrease of 20 million bpd and 30 million bpd, and there’s also a major difference between a production cut of 5 million bpd and 10 million bpd.

This huge uncertainty is a key factor behind the recent chaotic moves in the oil market. It’s hard to estimate how much demand was lost, and it’s even harder to estimate the pace at which demand will come back.

Until there’s more certainty about the pace of the economic recovery and more certainty about the actual size of the decrease in demand for oil, near-term oil contracts will continue to experience wild moves.

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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