BAKU, Azerbaijan, April 27
By Leman Zeynalova – Trend:
Oil traders must play the short game, and wait for markets to bounce back, Trend reports referring to the quarterly newsletter of Germany-based Uniper company.
The company said that oil markets face two challenges: Global demand contraction as a result of the COVID-19 pandemic; Increased oil production as a consequence of the OPEC+ failed agreement and Saudi-Russia faceoff.
“The result of these two challenges is a double-edged sword putting downward pressure on oil prices: negative demand growth on one side and a major oversupply of crude in the market on the other. A three-year pact between OPEC and Russia ended on 6 March 2020 after Russia refused to support deeper oil cuts to cope with the outbreak of COVID-19 and OPEC responded by removing all limits on its own production. OPEC producers will be turning the taps on in April 2020 as they revert to a market share strategy rather than price targeting,” said Uniper.
As the company said. the oil price war between Saudi Arabia and Russia, and demand loss due to COVID-19, has resulted in a massive contango market structure indicative of trading sentiment in favor of oil prices being higher in the future compared to current prices. “These levels have been unseen since the height of the global financial crisis in January 2009.”
As demand projections continue to be revised downward and producers increase output production, traders are pushing crude into storage to be released in market once prices rebound, said Uniper.
“2008 witnessed a super-contango structure where the industry ran out of spare storage capacity in on-the-ground facilities but the profitability of the contango trade was so big that it actually paid to charter super tankers explicitly for the purpose of storing oil. Fast forward to 2020, and oil traders are doing the same,” said the company.
But current market sentiment points to a bounce-back in consumption at the end of third quarter and for much of the fourth quarter of this year, with a further uptick in 2021 to follow, according to Uniper.
The International Energy Agency (IEA) suggests demand growth could rebound strongly and further rise by 2.1mn bpd in 2021.
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