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Oil Continues To Suffer As Short-Term Demand Outlook Gets Worse Day By Day

Vladimir Zernov

India’s 21-Day Lockdown Deals Another Blow To Oil Demand

Oil prices have ignored the recent market optimism related to the Fed’s unlimited quantitative easing program and the U.S. coronavirus aid package and continue to trend down after failing to gain a foothold above $24 per barrel.

In my opinion, fears about future oil demand as well as the potential limits of oil storage capacity play a major role in oil price weakness.

No day comes without an announcement of new virus containment measures. Among recent developments, India has ordered a 21-day lockdown on its population of more than 1.3 billion people to limit the spread of the virus.

India is an important oil consumer, ranking third behind United States and China. In this light, India’s decision is an additional material blow to oil demand in April.

According to Johns Hopkins University data, India has just 606 coronavirus cases, but the actual numbers are likely much worse due to lack of testing. Obviously, the Indian government would not have put the whole country under a three-week lockdown if it believed that the situation was still under full control.

Short-Term Downside Risk Is Still Material Despite Low Levels

Recently, oil prices have been trading at levels last seen in 2003, below the levels reached during the financial crisis and also below the levels seen during the excessive supply shock in early 2016.

Obviously, such low levels have attracted bargain hunters who wanted to establish positions in oil to profit from a rebound. However, the timing of such rebound is now completely uncertain as the situation with future oil demand gets worse day by day.

There’s an increased likelihood that most big economies excluding China will spend a big part of April under serious virus containment measures. This scenario will test the oil traders’ risk appetite as well as oil storage capacity.

Even if Saudi Arabia and Russia do not increase oil production after the current OPEC deal ends in March, the outlook for supply/demand balance is simply horrific. For oil to have sustainable upside, oil traders must see the light at the end of the tunnel – the end of virus containment measures and a mass return to work and travel.

Sure, oil prices can’t stay below $25 in the longer run as investments in production will be cut dramatically and the supply/demand balance will be restored. However, short-term risks of seeing sub-$20 oil prices due to a major dip in demand are very material.

This article was originally posted on FX Empire

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