WTI is witnessing wild price swings as U.S. producers send their crude to the Strategic Petroleum Reserve because commercial storage tanks are close to reaching capacity.
Oilprice.com’s Michael Kern warned of the possibility of negative oil prices later this month, saying that the reopening of the U.S. economy will prove crucial for crude consumption, and that ‘’If the reopening doesn't go as planned, however, it could lead to even more devastation, and in turn, even more downward pressure on oil prices.’’
While many analysts now predict Q2 crude demand to fall by up to 30 million bpd, some other analysts think we may have already seen the worst. EIA data last week (Weekly Petroleum Status Report April 22nd) showed a stabilization in the consumption of petroleum products, and as the U.S., Europe, and China are relaxing coronavirus measures, the demand for oil products is expected to slowly recover during the month of May.
Can We Expect A Quick Recovery?
A recovery in May and June is unlikely to do much good for oil prices in the short term. Refiners have slowed down activity as gasoline, diesel and even distillate inventories are soaring and will have to be consumed before refiners can ramp up refinery rates and buy new feedstock, forcing even more shut-ins during this period. Related: Low Oil Prices Won’t Hurt Tesla
Reuters’ John Kemp has reported that domestic crude output would have to fall by 3-5 million barrels per day to balance out the lack of demand in the next couple of months. Kemp sees a long and slow recovery for the downstream segment pointing at elevated storage levels and a slowly recovering economy.
Oil markets, however, tend to overshoot. The increasing number of well shut-ins and project cancellations could have a detrimental impact on crude supply in the mid-term.
UBS’ Chief Investment Officer Mark Haefele, this morning said that "While the oil market is heavily oversupplied this quarter, we expect it to move toward balance next quarter and become under-supplied in 4Q this year as lockdown restrictions are eased and oil demand picks up."
Haefele even expects a price shock to the upside towards the end of the year, saying that Brent prices could rise 110 percent from current levels, reaching $43 by the end of the year as markets risk becoming undersupplied during the last quarter of 2020.
UBS isn’t the only forecaster that sees a sharp rise in crude prices towards the end of the year. Both the IEA and OPEC see Brent prices increasing to $35-37 and $40 respectively towards the end of the year. OPEC President and Minister of Energy of Algeria Mohamed Arkab sees the quick recovery in Chinese demand as a harbinger of recovery.
Whether these bullish forecasts will materialize will depend entirely on the speed of production shut-ins and the pace of demand recovery.
Currently, the pace of shut-ins isn’t bringing crude markets much closer to balance. Martijn Rats, Global Oil Strategist at Morgan Stanley, in an interview with the FT said “Very little supply has been cut,” referring to it as “a negligible amount.” Related: Will The Fed Bail Out Struggling U.S. Oil Companies?
Producers have good reasons to keep on producing, even as oil prices fall into the single digits. The cost of shutting down production is sometimes bigger than the cost of keeping the oil flowing and companies often have commitments to suppliers, pipeline companies or royalty receivers.
Very low oil prices may boost the number of shut-in wells in May and June, but full storage tanks and lack of takeaway capacity will ultimately lead to forced curtailments on a global scale.
Until this happens, don’t expect crude prices to rise much.
By Tom Kool of Oilprice.com
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