On the supply side of the equation, the worst is behind us due to the high level of curtailment in the US shale output. But the same can not be conclusively said on the demand side of the equation as trade war risk linger and with the real rally showstopper, a second wave outbreak is a distinct possibility and could turn oil prices lower on a dime.
Ultimately over the near term, the latter will limit the oil markets’ topside ambitions.
Governments will need to calibrate by strictly phasing in economic re-opening and could be forced to lock down parts of the country against the risk of relapse in virus case counts if the data warrants.
Still, the initial phase of policy loosening may yield further demand upside for oil.
As such, this week’s US inventory will be scrutinised to support the market’s relatively optimistic view of supply/demand fundamentals for oil.
While there is little ambiguity that US production has fallen much more rapidly than expected, likely a function of voluntary curtailments by producers choosing to hold back for a better price environment and involuntary shut-ins due to low oil prices.
But looking at the bigger picture for oil, the key concern for the next few months will be on the demand side. And while thus far, it appears traders were right to call a floor in global demand in April.
But oil prices will remain sensitive to negative news flows, especially as they hint that the easing of global lockdowns might result in the 2nd wave of Covid-19 infections and, therefore, a more protracted impact on demand.
Traders are extraordinarily cognizant and extremely nervous about a secondary spreader. And unlike other risk assets, like stocks, which are traded on a six month+ forward-looking basis and supported by the incredulous amounts of fiscal stimulus, oil is traded on the spot markets and does not have that luxury. Hence, it is impossible to paper over demand falls.
And while we could expect that the world will face an enormous wave of oil price inflation once the economy returns to pre-pandemic all systems go, as the incomprehensibly-large global stimulus efforts will tailwind the oil price rally.
But as we saw in 2008/2009 though, the path from government intervention to asset price inflation is initially dangerous and rocky.
There will be lost of wobbles before liftoff. But during the ‘coronavirus crisis,’ the road to recovery could be pot-holed with fits and starts in the absence of a vaccine.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp