Oil prices fall on second Covid-19 wave fears - Rystad Energy comments

Oil prices are swinging from side to side these days, from gains to losses and back again. Today, the market is down mainly because of the following reasons: Firstly, the reemergence of some Covid-19 cases in Wuhan, plus the warnings from both the IMF and the top US disease expert about economic setbacks by reopening up the economy too quickly. Secondly, expectations that US crude inventories will show a larger build than last week are also weighting on the market. Refiners continue to struggle with weak demand and a growing oversupply of diesel, after having been forced to maximize diesel yields due to the gasoline demand collapse in April.

After seeing what lockdowns mean for the global oil demand any possibility that lockdowns will be extended in coming months is terrifying traders. They know well what that means for demand and if the second wave comes the supply glut will fatten up again and negative oil prices could be resurrected. This fear will always weight on the market every time new outbreak clusters come up. And prices will follow.

What about the bottom in oil prices, is it behind us or ahead of us? After the latest shut-ins and the news that more production will be cut in the Middle East, we now see an increased possibility that prices have already reached the bottom for this crisis already in previous weeks (unless a second lockdown wave comes).

It also matters which oil price we refer to here. Physical crude differentials from the North Sea to WAF and the Caspian Sea widened to huge discounts to Brent futures during April. North Sea diffs fell to as low as $8-9 discounts to the prevailing ICE Brent June futures contract (which itself traded as low as $19 in late-April at the depth of the price trough).

The current front month ICE Brent futures contract for July settlement will probably not need to decline much throughout May. However, the physical market is not completely “out of the woods” when it comes to supply-demand rebalancing. We see 8.9 million bpd implied crude stock builds in May-20, with some downside risk to that estimate. Although significantly down from the all-time-high 17 million bpd implied builds during Apr-20, the market will need to absorb crude into storage both onshore and at sea.

More supply cuts/shut-ins than currently estimated in our monthly field-level data will likely occur, along with higher OPEC+ cut compliance. But still, the market will build during May which begs the question of remaining working storage capacity for crude. Remaining onshore working storage capacity will be further reduced during May, but not yet to critically low levels globally, although pockets of storage capacity is already exhausted. The possible problem for operational capacity is pushed into June-July, but we believe we have avoided reaching tank tops.