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Oil Prices Fall As Demand Fears Trump OPEC+ Deal Optimism

By:
Vladimir Zernov
Published: Apr 14, 2020, 15:15 UTC

Oil is under pressure as the expected hit to oil demand is huge while the level of production cut deal compliance in May is unknown.

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Oil Video 14.04.20.

IMF Predicts That Global Growth Will Decline To -3% In 2020

While equity markets are showing optimism on signs that major countries will start to reopen their economies, oil prices continue to find themselves under pressure as investors and traders fear that the near-term hit to oil demand is too big.

Confirming such fears, the International Monetary Fund has issued its new World Economic Outlook. Currently, IMF expects that global growth will decline to -3% in 2020. Back in January, IMF expected that the world economy would grow by 3.3%.

The U.S. economy is expected to contract by 5.9%, while the euro area will take a hit of 7.5%, led by Italy, whose economy is forecasted to contract by 9.1%.

Interestingly, IMF continues to expect that China will show positive economic growth of 1.2% despite previous internal problems with coronavirus and the major hit to China’s customers.

I’d note that previous IMF forecasts have been rather optimistic, and the presented outlook is certainly not the worst-case scenario.

Energy consumption is directly tied to economic growth, so there’s nothing optimistic for oil in the forecast for 2020. At the same time, IMF predicts a major rebound in 2021, forecasting that world economy will grow by 5.8%. This is a prediction of a so-called V-shaped recovery.

Will Oil Producers Comply With Their Production Cut Promises In May?

Major oil producing countries have agreed to very ambitious oil production targets in order to support oil prices and prevent global oil storage from being filled completely.

However, the main question is whether such oil production cuts are realistic in May, which will be one of the worst two months (the other one is April) for oil demand.

Few market observers doubt Saudi Arabia’s ability to quickly adjust oil production. The U.S. shale oil companies are also very flexible, and many have already adjusted their production levels.

However, I seriously doubt that Russia will be able to quickly adjust its production like Saudi Arabia as it risks losing its oil production wells in case it stops producing oil too quickly.

Other participants of the deal may also experience various technological challenges when adjusting their oil production levels.

In short, the level of oil production cut compliance in May is a major unknown factor, and this uncertainty will continue to put pressure on oil prices until traders see first reports on compliance in May.

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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