On Monday, the crude oil market was the star of the financial show after the WTI barrel (May contract) dropped into negative territory. According to analysts at Danske Bank, the latest price action illustrates the extraordinary situation in which the oil market finds itself near term but, they see there are also stabilising forces longer term.
Key Quotes:
“So far, price declines have been concentrated at the front-end curve due to storage issues, leaving a steep contango with the 12-1M Brent spread at c.USD17/bbl. This invites cash-and-carry trades for those with idle storage capacity but such arbitrageurs are in short demand at present. Rather, we expect stabilisation to come from fundamental market dynamics ahead.”
“The current levels of oil prices will force producers to (continue to) cut back production but as demand recovers (at least partially) when lockdowns are eased, the inventory build should ease. In our base case of a sharp, but not very prolonged, global recession, this should help to form a bottom in prices in H2; we see Brent averaging USD35/bbl this year, rising to USD44/bbl on average in 2021.”
“Downside risks are dominating for now, with limited OPEC+ compliance, a slower-than-expected reopening of western economies and/or new virus waves requiring new closures still key risks. Upside risks are associated mainly with a shallower-thanprojected global growth downturn and/or changed hedging activity, e.g. if consumers start taking advantage of the downward level shift now also seen at the longer end of the curve.”
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