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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Thursday, July 09, 2020

Oil Market’s Deja-vu Moment

by Century Financial in Investment Insights

Oil Market’s Deja-vu Moment

Risks & Assumptions

The flyer does not constitute a Buy | Hold | Sell recommendation.

The purpose of this flyer is to analyze & provide information on the current state of oil markets with various factors under consideration. In the future, oil prices may not react linearly with factors mentioned. Owing to uncertain nature of markets, oil prices can still rise despite massive build up in stockpiles.

| WTI April 20th Debacle

April 20th, 2020 will be remembered as a historic day in world of global financial markets. WTI May contract dipped below 0 levels with the final settlement happening at -$37.63/barrel. The negative pricing primarily meant that producers were instead paying to offload their oil barrels to the consumers and avoid any extra storage overheads. The commotion was primarily based on confluence of factors including weak demand, uncontrolled production by loss making US Shale companies & lack of storage space for new production.

Chart – US Cushing Crude Oil Stockpiles (Source: Bloomberg)

As seen from the above chart, during the time when prices turned negative, US stockpiles at key crude storage facility in Cushing, Oklahama reached 65 million barrel mark (70 % of available storage capacity). Markets reacted adversely to this capacity constraint problem with producers getting heavily punished.

| Current Global Oil Demand & Supply

Chart – Global Oil Demand (Source: Bloomberg)

Chart – Global Oil Supply (Source: Bloomberg)

As seen from the above charts for global oil demand and supply, markets are entering a new normal phase where the overall demand & supply numbers are well below their peak levels seen during the start of this year. Although the current round of OPEC + production cuts has bought down the overall supply numbers closer to the demand side, fears of 2nd wave COVID 19 resurgence will only exacerbate pressure on markets. Global oil demand is currently peaking near 80 - 83 mbpd whereas the global supply stands in range of 84 – 87 mbpd.

| Making Sense of Chinese Crude Stockpile Build Up

As oil markets optimism grows on back of solid recovery in oil prices and expectations of further demand improvement for rest of 2020, one worrying data point comes out of China. Slide in oil prices over past couple of months has encouraged Chinese buyers to pile up their shopping carts with all kinds of available cheap crude. This has put immense pressure on the floating cargo storage available near Chinese sea ports. China's seaborne crude arrivals had hit 14.16 million b/d in June, a new record high following 10.21 million b/d in May. Chinese ports are currently struggling to unload record volumes of crude with storage tanks full. More than 80 million barrels of crude oil are currently waiting to be discharged from tankers in Chinese ports. China’s crude oil inventory is expected to jump by 440 million barrels in the H1 2020, a record number unmatched with any other country’s capacity. Any excess dumping by Chinese state run refineries that control bulk of the production throughput will adversely affect global energy prices.

For oil markets, this is a Déjà-vu of sorts of the April debacle that caused WTI to briefly trade in the negative territory. This also serves as a stark reminder of the uncertainty ahead and the volatile nature of the energy markets.

Data Source: Bloomberg

Arun Leslie John
Chief Market Analyst

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