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.


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992