World Economy

In its monthly oil market report, The Organization of the Petroleum Exporting Countries (OPEC) stated that “The world economy is forecast to face a severe recession in 2020, declining by 1.5%, following global economic growth of 2.9% in the previous year”. The US is forecast to contract by 4.1% and the Euro-zone by 6%in 2020

Those estimates were pretty optimistic, compared to the 3% contraction in world output forecasted by the IMF in 2020. 

World Oil Demand

For 2020, the OPEC world oil demand growth forecast is revised lower by 6.9 mb/d, to a historical drop of around 6.8 mb/d. The contraction in the 2Q of this year is expected to be around 12 mb/d, with April witnessing the worst contraction at about 20 mb/d.

The severity of the collapse is likely to result in sharper contraction in oil demand, particularly during 2Q20, extending into 3Q20 and 4Q20. In fact, the contraction is forecast to reach 12 mb/d in 2Q20, about 6 mb/d in 3Q20 and about 3.5 mb/d in 4Q20.

World oil demand decline in 2020 is estimated to be the sharpest in all oil market history. At 6,9% decline compared to previous year.

World Oil Supply:

The impact of COVID-19, ensuing global economic recession and oil demand shock, will also lead to supply disruptions. Benchmark oil prices plunge prompted companies to respond by cutting capital expenditure to the lowest in 13 years

Oil supply in 2020 is now forecast to show growth only in Norway, Brazil, Guyana and Australia.

The OPEC and NON OPEC countries agreed in their last meeting to cut oil production by about 10% in the coming months. Starting by a 9.7 mb/d between May and end of June, Followed by 7.7 mb/d cut from July till end of December 2020, and finally a production cut by 5.8 mb/d from January 2021 till April 2022. To reach a total oil production cut of 23% during the whole period.

Oil-market reaction to this deal has been muted, with the scale of the demand shock arising from the Covid-19 pandemic overwhelming even the level of these unparalleled cuts. The international energy agency (IEA) expects global oil demand to fall by 29mn b/d in April from a year earlier to 70.4mn b/d, a level last seen in 1995, as a result of the coronavirus pandemic. The decline in full-year consumption will amount to 9.3mn b/d, it said.

US CRUDE OIL INVENTORIES

In their Summary of Weekly Petroleum Data for the week ending April 10, 2020. The U.S Energy Information Administration (EIA) mentioned that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 19.2 million barrels from the previous week. At 503.6 million barrels, U.S. crude oil inventories are about 6% above the five year average for this time of year.

On a monthly average, crude oil inventories spiked higher to 17.19 million barrels.

As shown in the chart below there is an inverse relationship between crude oil inventories and oil price. As long as inventories are increasing, this means that demand is still weak, and no chance for oil prices to reverse from the bottom.

A key condition for demand to increase is by the end of the COVID-19 pandemic, or at least some signs that total cases rate of increase has reached its peak and start decreasing, along with the number of deaths.

OIL RIG COUNT

 According to Baker Hughes data report, worldwide total oil rig count fall sharply in March 2020 by 7.9% on a monthly basis, the largest decline since March 2016. While in the United States oil rig count declined by 24.41% on a monthly basis.

However, the decrease in total oil rig count doesn’t affect oil price because of the lack of demand.

CFTC COT REPORT

In the futures Markets we start seeing some buying pressure to build up. Money managers see some great opportunity in the oil market, so they rush to take earlier positions, calling a bottom at actual prices.

Actually from risk reward point of view, buying oil contracts at this level is a good opportunity and can generate a great return on investment (ROI). Unfortunately, oil prices cannot go negative, so the downward risk is already known but needs deep pockets to keep margins until the economic recovery starts again.  

RISK INDICATORS

The CBOE crude oil volatility index (OVX) is decreasing from historical volatility levels unseen before. But remains highly volatile (risky) at levels around 100.

From a technical perspective, a decrease below 65 closes the Gap made in early march, and even if that level is considered highly volatile historically speaking, it is a sign for volatility to calm down and that oil price has reached a level where it can no more dig bellow.

TECHNICAL ANALYSIS

Oil price is trending downward and reaches historical levels unseen since 2002.

In the graph below, the last remaining supports are 17.15$ of 2002 and 10.04$ of 1999.

(Click on image to enlarge)

In the next graph we present the trading set up and indicators to watch.

A set of conditions should be matched to take the long position.

(Click on image to enlarge)