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Oil Price Fundamental Daily Forecast – With Production Cuts Just Starting, Demand Controlling Price Action

By:
James Hyerczyk
Published: May 6, 2020, 03:42 UTC

Until the production cuts start to work their way through the global economy, the primary focus will be on the pace of the easing of restrictions and lockdowns and their effects on demand.

Oil Price Fundamental Daily Forecast – With Production Cuts Just Starting, Demand Controlling Price Action

U.S. West Texas Intermediate and international benchmark Brent crude oil settled higher on Tuesday as traders reacted to the news that some European and Asian countries along with several U.S. states began to ease coronavirus lockdown measures.

The rally suggested that traders are starting to bet that with the reopenings, demand is going to improve after several months of devastating demand destruction. Furthermore, the OPEC+ production cutbacks just started on May 1.

On Tuesday, July WTI crude oil futures settled at 26.49, up $3.71 or +16.29% and July Brent crude oil finished at $30.97, up $3.77 or +12.17%.

Demand in Focus

Until the production cuts start to work their way through the global economy, the primary focus will be on the pace of the easing of restrictions and lockdowns and their effects on demand. Fuel demand worldwide was down roughly 30% in April, but demand is rising modestly due to efforts to lift travel restrictions.

Italy, Spain, Nigeria and India, as well as some U.S. states including Ohio, began allowing some people to go back to work and opened up construction sites, parks and libraries. Health experts, however, have warned that such moves could cause coronavirus infections to rise again, according to Reuters.

Major Analysts See Improving Demand

Vehicle traffic in most of the United States, including those parts that have yet to lift shelter-in-place, orders, has also rebounded, RBC Capital Markets research said in a note.

Swiss bank UBS said the easing of restrictions would help balance out supply and demand, leading to a shortfall in supply by the fourth quarter.

Morgan Stanley said the peak of oversupply in global markets had likely been reached and a storage crunch was abating.

“Inventories have built but not quite as strongly as feared:  With social distancing measures ramped up in March…the observed inventory increases have not been quite as strong as feared,” it said in a note.

Not All the News is Encouraging

Vitol Chief Executive Russell Hardy told Reuters long-term peak demand may be permanently eroded. Global demand sank by 26 million to 27 million barrels per day (bpd) in April, and Hardy predicts a year-on-year drop of more than 8 million bpd.

In addition, air traffic is not expected to rebound soon, which will slow recovery for fuel demand.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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