On April 20, 2020, U.S. crude oil futures fell by 300% to an all-time low of -$40.32 a barrel for the first time in history. Two factors contributed to this decline: Firstly, crude oil storage was much too full. Secondly, refineries were running at historically low levels due to COVID-19 lockdowns. Now, with no relief from the pandemic, where is the oil price heading for the rest of 2020? To answer this, we need to understand what the main drivers of the oil price are: Supply, demand, and market sentiment.

Global Crude Oil Supply Trend

Since the start of the second quarter of 2020, oil production levels have changed significantly. Most OPEC and Non-OPEC nations have agreed to cut production levels — Some oil producers in the U.S. and Canada are forced to reduce production by 3.5 million barrels a day because of these historically low prices, while others have done it to offset the lower demand. For example, in May 2020, OPEC nations produced 24.77 million barrels of oil per day (down by 5.91 million barrels per day over the same period in April 2020).

During the same quarter, countries like India, China, Korea, and the U.S. created strategic storage solutions for up to 200 million barrels in an effort to take advantage of these lower oil prices. Altogether, these measures are sure to create a deficit in supply for the third quarter of 2020.

Global Crude Oil Demand Trend

Due to COVID-19, global oil demand fell by 9.3 million barrels per day. In April 2020 alone, (year-on-year) oil demand lowered by 29 million barrels per day. It is expected that, in Q2 or 2020, oil demand will be lower by 23.1 million barrels per day compared to Q2 2019. If lower demand is not met with cuts in oil production by OPEC, the U.S., and Canada, then the oil price will almost certainly take a hit.

Commodity Cycles and Market Sentiments

Crude oil prices have a short cycle of 6 years and a long cycle of 29 years. Other factors that affect market sentiment can be calculated by understanding the general position of hedgers and speculators in the futures market.

Market sentiment can be calculated from the futures position of hedgers and speculators. In the last week of May 2020, hedgers (i.e. oil producers) had more short positions (1,297,095 contracts) than long positions (725,955 contracts). On the contrary, speculators (i.e. traders) had more long positions (701,234 contracts) than short positions (158,660 contracts). If you combine the position of market participants with the market cycles, one can make a reasonable estimate of oil price movement.

EIA expects Brent crude oil prices will average at $32 a barrel during the second half of 2020 and $48 a barrel on average in 2021. However, this price path reflects an expected global oil consumption to 97.4 million barrels a day during the second half of 2020 along with relatively high compliance to announced OPEC production cuts, both of which are uncertain. The degree to which the U.S. shale industry responds to the current low prices will also affect the oil price path in the coming quarters.


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Founder and fund manager at Lax Capital. Chartered FCSI and disciplined long term value investor.

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