Undoubtedly, the dominant factor in the oil market for the next twelve to twenty-four months will be the progress of the pandemic, which will reduce economic activity and thus oil demand to an uncertain degree and with unpredictable timing. My take is that once inventories are no longer filling, prices will recover somewhat, with Brent reaching $35-40 and WTI $5 below that. Until the inventory overhang is significantly reduced, prices will not reach $50. I will suggest certain indicators that might provide guidance as to the likely path that prices will take.

Key Indicators On The Oil Price Path ‘After’ Covid-19- oil and gas 360

Source: Forbes

First, without a doubt there will be continued cases of covid19 and in particular, countries with less developed health systems are likely to be hard hit. Oil demand will be more influenced by the path in the advanced, wealthier nations, some of which are already moving towards reopening. The biggest concern is of a second wave in the near future, before testing has reached levels necessary to control hot spots, and countries like South Korea, China, Italy and Germany will serve as test cases. If breakouts in those countries can be identified and contained quickly without new lockdowns, the implication is that oil demand will be largely recovered by mid- to late-summer. If not, and new restrictions are imposed, demand will remain depressed and inventories will continue filling.

The vital question of storage adequacy (or the end of it) can be addressed by some indirect indicators, including the level of contango on the futures market, which is a less than perfect measure of storage costs. The recent decline in the contango, which was $10/barrel over the coming three months but now is under $5/barrel, implies that some holders of empty capacity released it when prices for storage were very high. It also suggests that the traders’ perception of the likelihood of full storage and large-scale involuntary oil production shut-ins have eased. If the contango begins increasing in June, the implication is that storage is becoming scarce.

Tanker rates also act as an analog for storage costs, especially given the potential for their use as floating storage. Rates have declined since earlier in April, partly reflecting the new OPEC+ production cuts which reduced the oil being exported. The production cuts are scheduled to hold through the end of June and then be decreased slightly, but it seems inevitable that storage will be filling through the month of June. The IEA’s April Oil Market Report the market might return to balance in July, that is, the loss in demand would be more than offset by the OPEC+ production cuts, shown below. (Needless to say, they described that forecast as “fraught with uncertainties”.)

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