15 July 2020
- The contraction of supply between March and late May, as discussed in previous research notes, has come to an end during week #27. The oil market has clearly entered a different phase, this time of supply expansion. This is evident from our proprietary metric of physical market selling pressure. We now share the opinion that the observed supply accumulation for weeks #27-31 is the result of both weak demand-pull and renewed supply-push along the oil supply chain. The former is a function of the weak economic activity. The latter is a function of increasingly favorable market price vs. economics of extraction.
- The economic activity in Asia, Europe, and even USA continues to rebound but this is happening from a very low base. The rebound in June and July is also weaker than we estimated initially. This is partially down to the unconvincing measures in the USA to control the pandemic and reopen the economy. Regardless, we continue to see encouraging signs of some refinery operating capacity coming back online to satisfy the comeback of downstream demand. Forward demand (2nd half of July and early August) continues to look encouraging. We estimate that the weakness in demand for weeks #28-30 will be followed by strong increase. It remains to be seen if this will be enough to neutralize the emerging supply surge.
- The macro environment for crude oil has improved but there are reasons to remain cautious. On the positive side, there is evidence which suggests that credit is expanding in key consumption regions. We continue to expect credit to grow as economies re-open and the demand for credit lines from economic entities grows but at slower pace when compared to the late May-early June period. Last time we wrote that “The pressure building up on the FX markets is a concern for us. This is because it is signaling an erosion in purchasing power of key crude oil buyers” . As of today we are still concerned as the FX markets appear to have imposed a ceiling on the oil price for now - see the chart of the week for the latest development.