Crude Oil

Oil Gains Ground On Signs That Demand Is Set To Increase

Oil Video 08.05.20.

Goldman Sachs Believes That Supply/Demand Balance Will Improve By Summer

Oil prices have enjoyed material upside in recent days as the world economies started to reopen and demand for oil began to increase.

Goldman Sachs has shared its new oil demand estimates. The company believes that oil demand decreased by about 30 million barrels per day (bpd) in mid-April, and that currently demand is down by 19 million bpd.

In June and July, Goldman Sachs expects that demand will be 12 million bpd lower compared to pre-crisis levels. In August, demand is set to be down 5 – 6 million bpd from “normal” levels.

While demand is set to increase, production will stay at lower levels due to the OPEC+ production cut deal and the continued production cuts from non-OPEC+ countries which are mostly dictated by production economics.

For example, the U.S. domestic oil production is already down to 11.9 million bpd according to the latest EIA Weekly Petroleum Status Report. Such production cuts are expected to continue as companies try to adapt to sub-$30 WTI prices.

The main problem for the market is to work through excessive oil inventories which continue to increase. The inventory overhang will serve as a major obstacle on oil’s path to levels above $30 per barrel.

Futures Curve Flattens As The Market Stabilizes

At this point, it looks like the previous problems with front-month contracts are over, and the marketplace has transferred to a healthier state.

In late April, the United States Oil Fund ETF announced its decision to rebalance into longer-dated contracts which led to panic in the June 2020 contract, but this panic likely marked the bottom for oil.

Since then, the front-month contract has recovered firmly above $20 and the futures curve has flattened as a result of this recovery.

Currently, WTI June 2020 contract is trading above $24 per barrel while September 2020 contract is just below $29 and December 2020 is at $31.

The market expects a gradual return to a new normal: the December 2021 contract is at the $35 level, and it looks like the oil inventory problem is material enough to make traders cautious about making bets on a stronger recovery in oil prices.

However, oil is famous for its volatility and unpredictability. We’ve seen oil close to $150 per barrel, and we’ve seen the front-month contract change hands at levels below zero. As usual, oil traders will have to stay glued to their screens searching for any hints on how the future supply/demand balance would look like.