Post-negative oil: Crude demand, prices to fall further

There is more pain for the crude oil market as demand, which has already been falling before COVID-19, has plunged about 64 per cent in April so far and is likely to fall by another 20 million barrels a day calling for more production cuts, according to a report.

Generally, the global demand for crude oil remained at around 100 million barrels per day (mbpd) during pre-COVID-19, and the Organization of the Petroleum Exporting Countries (OPEC) announced a 10 mbpd cut last month but it seems that is not enough.

"Crude demand is expected to decline by over 20 mbpd in April alone. Typically, global demand is around 100 mbpd. Given this scenario, supply curbs would have limited influence and consequently, Brent prices will settle in the USD 25-30 range for the second quarter and may increase marginally in H1 (second half) of 2020," Crisil said in a note on Tuesday.

"The huge inventory build-up and lack of storage facilities will also more pressure on prices. Overall, Brent can average USD 30-35 in 2020, with a strong downward bias," the report warned a day after the American crude futures prices (West Texas Intermediate or WTI) fell over 305 per cent to a negative USD 40 bpd on Monday as those who had booked earlier refused to take delivery due to lack of storage.

The Crisil note said the first half of April saw Brent prices plummeting 63.6 per cent to USD 26.9 a barrel, while prices of WTI had also fallen similarly by 63.1 per cent. But, on April 20, WTI prices turned rapidly negative as traders on the New York Mercantile Exchange (NYMEX) rushed to offload their May futures positions a day before expiry of contracts on April 21.

WTI futures are traded on the NYMEX with contracts settled in physical crude. The problem is that those who had gone long are unable to find storage facilities for the oil and had to liquidate their contracts before expiry or pay someone else to buy their stock. This caused a 305 per cent plunge in WTI prices into negative territory, a first in the history of the industry.

However, the June WTI NYMEX futures are hovering at around USD 21, while Brent for June delivery is USD 25 a barrel.

"Demand for crude was declining already due to the slowdown and the COVID-19 pandemic-driven lockdowns crushed it further. Consequently, oil demand is expected to contract by 8-10 million barrels per day in 2020 assuming demand recovery begins from the third quarter of the year. But if recovery doesn't happen by then, further demand destruction is on the way," the report said.

"On the supply side, we see producers reining in output following a strategic deal between the Opec, Russia and the US. Under this agreement, OPEC+ may cut production by 9.7 mbpd for May and June, but gradually ease the curb to 7.7 mbpd between July and December 2020, and to 5.8 mbpd till April 2022 to stabilise prices. This is expected to reduce some surplus in the market by the end of 2020," the report said.