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Commodities

Oil Markets Poised to Get Worse Before Improving

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  • The rapid shuttering of activities in Europe and North America, just as China is seeing a rapid recovery, points to a potentially even steeper decline in demand than previously assumed. As the pandemic worsens, more countries are imposing the type of lockdown and social distancing measures seen in China and Italy. Oil is directly hit by these measures. Transport fuel demand could fall by as much as 70% in affected regions. With such a steep demand decline, losses could exceed 16m bbd or more in 2Q, multiple times larger than what the world has ever seen.

 

  • Citi analysts project that in their base case, the oil demand impact from COVID-19 and the possible subsequent economic slowdown could be around 8.7m bbd on an annual basis. Thus, 2020 oil demand growth could end up being down by 7.5m bbd against a growth of 1.25m bbd expected in late 2019.

 

  • Global inventories look set to rise to unprecedented highs above prior peaks. In the near-term, tensions may continue between Saudi Arabia and Russia, before eventually coming back to the table to make production cuts of some sort, such as reverting to December 2019 quotas, as refiners drop crude buying and storage fills up. Oil stock can also overwhelm storage, whether due to capacity or in terms of how quickly it can fill.

 

  • The radical decline in demand in 2Q may in turn see refinery runs collapse by over 2m bbd, and trigger an unprecedented growth in inventory of one billion barrels over two months. This could result in a combination of a severe price collapse to less than US$10/bbl (Brent) at times and a severe curtailment of production. Citi analysts now expect Brent and WTI prices to average US$17/bbl in 2Q, moving to the US$25-$30/bbl range in 2H 2020 and averaging in the US$30’s for 2021.

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