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  • Oil on the way to test the lowest levels since 2002, last scored in March.
  • WTI on the back foot as demand shock outweighs OPEC+ resolve. 

Despite a historic agreement over the weekend to attempt to hold-off a further collapse in the energy market, oil has been weighed down by a global glut of crude pertaining to the COVID-19 shutdowns and slowdown in business activity and global growth. At the time of writing, West Texas Intermediate is trading -9.37% on a spot basis at $20.24 having travelled form a high of $23.03 to a low of $20.00, homed in on the lowest levels since 2002 scored in March this year at $19.29. 

A month-long price war between Saudi Arabia and Russia and COVID-19 sent oil prices over a cliff and not even an agreement by major producers to cut output has been able to lift prices sustainable. Markets are susceptible that enough of a cut was agreed and that the global economy can return to a level of growth in the aftermath of COVID-19. The International Monetary Fund is forecasting a contraction in the global economy at a 3% for 2020 followed by a 5.8% rebound in 2021, making for a worse recession than during the 2008-2009 financial crisis. The IMF said the US economy, the largest producer and consumer in the world of energy, would shrink 5.9% this year. (The US, accounting for nearly 20% of world’s total oil consumption, is the biggest oil-consuming country and is also the world’s second-biggest natural gas and coal consumer).

Larger output cuts will be on the cards

The demand shock means that there will be oil products in storage and larger output cuts will be on the cards. OPEC+, agreed Sunday to cut overall crude-oil production by 9.7 million barrels a day starting on May 1 through June 30 of this year. The total cuts would decline to around 8 million barrels a day from July 1 through Dec. 31, followed by a smaller 6 million barrels in cuts from Jan. 1, 2021 to April 30, 2022. However, markets are looking for something more in line with what US President Donald Trump had advocated for, which would be double these amounts. 

“We expect a long road to recovery, as the large Q2 surplus will translate to a large inventory overhang which will take time to work through,” analysts at TD Securities argued.

It goes without saying that energy demand is likely fairing worse that our broad commodity demand indicator, which has yet to improve. Contangos also remain extremely steep — this translates to a high carry associated with speculative length. CTAs remain well positioned for further downside, and a buying program is unlikely to ensue.

WTI levels