Crude oil turns lower as overhang of supply weighs Crude oil turns lower as overhang of supply weighs Crude oil turns lower as overhang of supply weighs

Crude oil turns lower as overhang of supply weighs

Ole Hansen

Head of Commodity Strategy

Summary:  Crude oil's recent recovery has run out of steam as the overhang of supply continues to weigh on the market. This despite signs that activity in China has begun to slowly pick up and the government has stepped up its efforts to support the economy. The demand shock has created a major challenge to the OPEC+ group of producers and so far they have failed to agree on any additional production cuts


Crude oil's road to recovery remains long and paved with obstacles. A short-lived spike at the beginning of January on geopolitical developments quickly gave way to the dual negative impact of rising non-OPEC production and more importantly the Covid-19 outbreak in China. Demand for fuel products in the world's second largest economy is estimated to have dropped by more than 3 million barrels/day with major cities under lock-down and travel restrictions in place.

With these developments in mind the market has once again been turning to the OPEC+ group of producers for support. In addition to existing OPEC+ cuts a 600,000 barrels/day reduction has been discussed but not yet approved. While Saudi Arabia who needs crude oil closer to $80/b than the current $50/b has supported the reduction Russia has so far not made any commitment. The combination of a much lower fiscal breakeven price and a weaker Ruble has made the Russians less exposed to the latest price slump. 

From a chart perspective the upside potential for Brent crude oil looks limited to $60/b while the low point, depending on the length of the virus disruption may have yet to be found. 

Monthly oil market reports from the US Energy Information Administration, OPEC and the International Energy Agency, released last week, all tried to gauge to impact on demand from the current virus disruption. While OPEC lowered its 2020 world oil demand forecast to 1 million barrels/day in 2020, the IEA went a few steps further and cut demand to 0.83 million barrels/day, the lowest since 2011. 

The chart below shows why global oil prices are under pressure as the gab between non-OPEC production and world demand continues to widen. The IEA in their Oil Market Report wrote

"The call on OPEC crude plunges to 27.2 mb/d in 1Q20, which is 1.7 mb/d below the group’s January production of 28.86 mb/d." It continued "From the point of view of the producers, before the Covid-19 crisis the market was expected to move towards balance in the second half of 2020 due to a combination of the production cuts implemented at the start of the year, stronger demand and a tailing off of non-OPEC supply growth. Now, the risk posed by the Covid-19 crisis has prompted the OPEC+ countries to consider an additional cut to oil production of 0.6 mb/d as an emergency measure on top of the 1.7 mb/d already pledged"

The current price weakness has occurred despite a dramatic and involuntary loss of production in Libya. Since January 18 its output has slumped by close to a million barrels/day because of a blockade of ports and oilfields.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.