Oil market update

Oil prices enjoyed strong gains recently and almost broke to new multi-week highs yesterday. However, bulls gave up at the end of yesterday's session and pullback occured. Prices try to recover today.

Demand shows signs of recovery

In the first place, it should be said that there are more and more signs of demand recovering. Data from China released yesterday showed that maritime trade is rebounding and fuel demand rises along with it. Traffic data from the United States and Europe also shows improvement. Drop in demand for car fuel was among the biggest contributors to the overall drop in demand. Of course, the bulk of a global aircraft fleet is still grounded and it, in turn, demand for other types of fuel is still depressed (this can be seen in US distillate inventories data).

Saudi Arabia boosts export prices

Moreover, Saudi Arabia and Russia boosted the price of their crude for European and Mediterrenian refineries, exerting big upward pressure on oil prices. Prices were increased by $5.80 and $7.50 respectively. This is a sign that Saudi Arabia and Russia are not only limiting production but also curbing exports.

Goldman Sachs expects a big shift on the oil market

Goldman Sachs stays optimistic about the oil market. The Bank expects a V-shaped recovery in demand and L-shaped supply situation - output declining and remaining at depressed levels. According to Goldman Sachs, voluntary production cuts will reach 10 million barrels per day by June while 6 million barrels per day were already slashed. (Bloomberg still forecasts average Q2 supply at 99 mbpd)

Having said that, Jeffrey Currie, chief of Goldman Sachs commodity research, expects a deficit on the oil market by June! He claims that demand in China is already only 5% lower against peak compared to a 25% drop at the worst moment of coronacrisis. At the same time he claims that production will start to rise once prices climb back above $30.

Is there any logic in this?

It should be said that these are very bold forecasts. Assuming that supply drops by 20 million barrels to around 80 million barrels per day, demand would need to recover to above 80 million barrels per day for the deficit to arise. Bloomberg estimates that demand will average at 86-88 million barrels per day in Q2 2020 but amid much higher production. The next two weeks will show how much US production has dropped and if a deficit is really possible. One could expect oil prices to try to move into the upper parts of consolidation range on such revelations. Brent price could move to $38-40 area while WTI may revisit $28-30 area. Prices could move even higher in case more evidence of a deficit surface. However, in our opinion it will be hard for producers to adhere to agreed output cuts, what will make oversupply remain on the market. Prices could trade sideways in such a scenario. Apart from that, one should keep in mind that WTI is likely to be much cheaper than Brent due to US storage being almost full. Moreover, Saudi tankers are waiting near the US coast and it could increase pressure on WTI.

Brent must break above the $30-32 area. A downward trend line can be drawn on recent peaks and it could limit upside. In our opinion, price may try to test the upper bound of March's bearish gap in the coming weeks. Source: xStation5