Travel bans, border closures, and recommendations for self-isolation amid the coronavirus pandemic have aggravated fears of a global recession and pushed money managers to intensify the sell off of crude oil and fuels contracts, data reported by Reuters’ John Kemp shows. While just two weeks ago things were beginning to look up for oil after the first sell-off wave, now the future looks bleak.
Money managers sold some 180 million barrels of oil and fuel contracts since February 18, Kemp reported, which doesn’t bode well for this particular commodity market as prices have been falling in this period and it hasn’t deterred funds from selling.
Just how much things could change over two weeks becomes apparent when one compares the mood in the oil market in early March to what we are witnessing now. In early March, days before the OPEC+ meeting, most expected an agreement on deeper production cuts that would mitigate the devastating effect Covid-19 was already having on the global economy. And then Russia refused to play ball and said it was going back to normal production rates.
Saudi Arabia was quick to respond by saying it would turn up the taps and start pumping 12.3 million bpd in April, in addition to raising its production capacity to 13 million bpd. Oil prices were even quicker to respond, with Brent and West Texas Intermediate crashing below $40 and WTI even slipping below $30 a barrel this week.
Meanwhile, quarantines expanded across Europe as new coronavirus cases multiplied. Banks and consultancies rushed to revise their oil demand forecasts for the year with every one bleaker than the previous one. Expectations are now for billions of barrels daily in lost demand, which is not doing anything for prices but pressuring them further.
Consultancy Eurasia Group summed up the situation in a recent report, “With international aviation virtually at a halt, land transportation (especially private vehicle usage) also stalling, and even shipping experiencing a decline amid factory closures and the shutdown of the cruise sector, oil consumption heading into the second quarter could endure the biggest contraction on record during what will probably be a global recession.”
There is, however, a silver lining. For starters, bargain hunters are emerging from the shadows. As Reuters reported earlier today, Brent and WTI jumped by more than a percent from Monday’s close thanks to bargain hunting along with short covering, although the latter is not necessarily a good sign for the oil market.
Reports that the U.S. government will buy some 77 million barrels of local crude for the Strategic Petroleum Reserve also had a positive implication for prices although the move aimed to not just help local producers but also take advantage of the low prices, which means some producers would end up selling oil below the cost of production.
Speaking of U.S. producers, and specifically shale oil producers, they are starting to trim production because, for most, production costs are above current WTI prices. In fact, according to Rystad Energy, only 16 shale oil producers have production costs of below $35 a barrel.
Even these, however, are in a rush to curb spending and this means, among other things, idling rigs. This, in turn, means that we could see a slowdown and possibly even a reversal of U.S. shale oil production growth later this year, which would send a strong bullish signal to the market.
Risks remain, however, and they are not just coronavirus-related. According to a Reuters report from this week, the U.S. is not the only one filling up its reserves of crude oil. Other countries are taking advantage of the low prices, too. Storage space, alas, is not infinite, especially in the current demand situation.
“If storage does fill, quashing that demand, oil prices are sure to collapse further, and the global markets will then have to hope that the dispute between Saudi Arabia and Russia is resolved before we reach that point of no return,” Stephen Innes, chief markets strategist at AxiCorp told Reuters.
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