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Oil Sinks To New Lows As Demand Is Destroyed By Virus Containment Measures

Oil prices find themselves under pressure once again as oil demand is set to nosedive in April.
Vladimir Zernov
Crude Oil

Demand Destruction In Spotlight

It did not take long for oil to turn its previous weakness into new lows. Currently, oil is trading near the $20.00 level after visiting new lows below this psychologically important mark.

The key catalyst for this oil price weakness is the upcoming huge supply/demand imbalance in April. The OPEC+ deal ends, while Russia and Saudi Arabia have previously promised to increase oil production.

Even if both countries do not fullfill their promises and choose not to increase production, the hit to demand will be so big that Saudi Arabia’s or Russia’s failure to boost oil production won’t be noticed.

The U.S. has decided to extend virus containment measures until the end of April, which will lead to a major hit to oil demand in the biggest economy in the world. Also, it is already clear that the hit to demand will be long-lasting even if all virus containment measures are lifted in May.

It is highly unlikely that consumers who have suffered from the double shock of virus threat and the resulting unemployment will immediately start to freely spend money, drive and fly.

Thus, the negative effect of the current coronavirus containment measures will last for months after the acute phase of the crisis is over, which does not bode well for a fast rebound of oil prices.

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Crude Oil Stocks Reports Will Increase Their Market-Moving Power

So far, we haven’t seen any dramatic change in U.S. crude oil stocks. The next release is scheduled for April 1, 2020, and it will be interesting to see whether the current virus containment measures have already had a major impact on crude oil stocks.

I’d note that many oil benchmarks have already settled below $20 per barrel, while some benchmarks like the Western Canadian Select is firmly below $10.

This situation is unsustainable, so oil producers will have to cut production to allign it with the current demand. Currently, major oil producing nations want to see others blink while keeping their production levels intact or even increasing them.

In this situation, the crude oil stocks reports will increase their market-moving impact as traders and investors search for any hints regarding the severity of the current supply/demand imbalance. I maintain my view that oil demand will take a huge hit in April, putting additional pressure on oil prices.

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