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Oil market recovery depends on how long COVID-19 measures are in place - Energy economist

Photo: Mohssen Assanimoghaddam/dpa

By Siti Radziah Hamzah

KUALA LUMPUR, April 21 -- The worst may not be over for the oil market as West Texas Intermediate (WTI) ended its May contract trading about US$30 below zero on Monday, the first time oil prices have ever turned negative.

WTI crude is a specific grade of crude oil and one of the three main benchmarks in oil pricing, along with Brent and Dubai crude. WTI is known as a light sweet oil as it contains 0.24 per cent sulphur, making it 'sweet' and has a low density, making it 'light'. 

WTI for May delivery closed at -US$37.63 per barrel yesterday. It started the day at US$17.73 a barrel and touched an intraday low of -US$40.32 per barrel. 

At the time of writing, the same contract had rebounded to US$0.60 per barrel.

In a note to clients, ABN AMRO Bank NV senior energy economist Hans van Cleef said the high inventories in combination with the oil demand shock caused by the COVID-19 measures triggered a steep contango for oil prices. 

Although many investors and market participants had already shifted their outstanding positions from May contract to the June contract in the days before, the final trading before physical delivery triggered high pressure on the contract, he said. 

The bank expects a recovery in the second half (H2) of the year, coincidental with a recovery in oil prices, but also anticipates a cap on the upside potential due to high inventories and the delayed effects on US shale production.

Van Cleef said recovery in the oil market would strongly depend on how long the COVID-19 measures would be in place and lower global oil demand. 

"The longer it takes, the longer upside potential for oil prices will be limited as the high inventories will hang over the market for a long time," he told Bernama in an email interview. 

More than half of the world's population in more than 90 countries or territories have now been asked or ordered to stay at home by their governments to prevent the spread of the deadly COVID-19 virus. 

The US Energy Information Agency said last week that the US storage was about 55 per cent full, with daily additions close to 2.0 million barrel per day in the previous couple of weeks.

Assuming that most countries would start to ease the measures in June or July and oil demand began to pick up, the market could see a price recovery in H2 2020, van Cleef said. 

"This all depends on the coronavirus measures. However, the upside potential will remain capped by the high inventories. So, main drivers are the effects on oil demand due to COVID-19 and the supply/inventory glut, which remains after demand starts to pick up again.

“The fact that WTI was trading below the Brent price was a consequence of the OPEC production cut agreement,” he said.

At the time of writing, Brent crude fell 1.33 per cent to US$25.23 per barrel.

Van Cleef added: “Brent crude mainly reflects the floor, which is the result of the active production cut by OPEC and its partners led by Russia. In the US, the production is also expected to decline, but this will be the result of market dynamics.

“In other words, oil prices need to trade lower for longer to trigger these production declines. The first signals are there with the number of active drilling rigs falling from 683 to 438, and US crude production down from 13 million barrels per day to 12.3 million barrels per day in just a few weeks.”

According to news reports, Saudi Arabia is set to sell about 600,000 barrels a day to the US in April, the highest volume in a year.

Citing a Saudi industry official familiar with allocations to American refiners, the reports said the shipments, agreed with refiners as Saudi Arabia ramped up production to a record 12.3 million barrels a day this month, came at a moment when demand in the US was depressed due to the lockdowns.

Van Cleef said Saudi Arabia was trying to balance the market.

“With oil prices below US$40, the US shale oil industry will be hurt anyway. It may not be Saudi’s aim to hurt the US, but they would certainly not try to support it either," he added. 

Meanwhile, AxiCorp chief global market strategist Stephen Innes still foresees a lot of downside risks even as economies begin to reopen.

“Oil prices will be the last to recover as border openings and travel alerts will get removed last, so people will be slow to fly, take trains or even drive.

"My less bearish view, however, is we will get a voluntary hefty cut supply that will extend two to three months, and I expect the US oil well closures to accelerate. But the initial shocker should abate," he added. 

Innes said Monday's oil crash was a short-term volatility with the market eventually ending the June contract around US$25-US$30 and jumping to US$40 per barrel for the rest of the year as the world opened back up. 

-- BERNAMA

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