*Oversupplied in April to the tune of 25 million barrels per day
*Oil punters have been watching unfolding developments in the energy space
Brent crude rallied nearly 12% on Thursday on hopes of a supply deal among major oil producers led by Saudi Arabia and Russia to alleviate a price collapse triggered by the coronavirus outbreak. US President Trump says deal could come in ‘a few days.’ Speaking at a government meeting on Wednesday, Putin said that both oil producers and consumers should find a solution that would improve the “challenging” situation of global oil markets. Brent crude futures rose to $27.87, while US West Texas Intermediate (WTI) crude futures increased at $22.55.
April to be one of toughest months in oil history, the market is oversupplied in April to the tune of 25 million barrels per day, as the deepest loss in oil demand on record coincides with a surge in core-OPEC crude exports spearheaded by Saudi Arabia. There’s nowhere to hide from this tsunami of oversupply, and diplomacy won’t be able to help the physical oil market nor oil prices in the short term. The low isn't in yet for crude. Oil punters have been watching unfolding developments in the energy space.
Although US shale companies have been able to cut their average production costs by nearly half to around $43.83 per barrel compared to $82.75 per barrel in 2012, only 16 U.S. shale companies can make money at oil prices below $35 per barrel. In a research note from Standard Chartered revealed that the company expects excess supply to average 18.3 million barrels per day in the second quarter (2Q) and to peak at 21.8 million barrels per day this month.
Covid-19’s impact on refineries is finally showing, with runs at just over 82% of capacity, way below norm for this time of year. Production meanwhile remains near an all-time high of 13 million barrels, proving that the impact on shale output hasn't really set in yet by EIA estimates. Analysts estimate global oil supply starts April close to 3.2 million barrels per day higher year on year, while we forecast global oil demand will be lower 18.5 million barrels per day year on year in April.
Physical crude prices are already in single digits and we would not be surprised to see further prints of negative oil prices in niche crude spot markets. I think that the leaders of Russia and Saudi Arabia will work it out over the next few days; both know what they have to do, Mr Trump told a White House press conference, without giving any further details as to why he was so confident a deal would emerge.
President Trump is set to meet Friday with the heads of some of the largest US oil companies to discuss measures to help the industry weather an unprecedented oil crash, people familiar with the matter said. Some analysts cautioned there is still a long way to go before any output cut agreement is struck. Research firm Rystad Energy estimates global crude oil demand in April will fall nearly 23% year-on-year to 77.6 million bpd.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 2-4-2020