Crude oil prices were under pressure early in the session as weak economic data weighed on sentiment. Signs of deep US recession emerged with retail sales and factory output down sharply. However, the outlook looks grim with the New York Fed’s manufacturing index falling to -78.2. Sentiment was helped after the IEA said that global oil demand will probably fall 9% in 2020 and that storage tanks will probably fill by mid-year. This appears to be playing out in the US, with inventories rising the most on record. Stockpiles jumped by 19.25mbbl last week, according to the EIA. Gasoline and distillate inventories recorded large gains, no doubt magnified by resilient output, which fell only 100kb/d last week. WTI prices regained some of the losses after news emerged of a US plan to pay producers to leave oil in the ground. The Energy Department has drafted plans to compensate companies for sitting on as much as 365mbbl of oil reserves. It will be counted as part of the government’s strategic stockpile.

Nevertheless, it’s clear to the market that the recent OPEC+ supply agreement will only limit the worst of the damage that restrictions on people’s movement is having on demand.

The high-frequency demand data point to 7 mbd contraction in global oil demand in March

We update our high-frequency demand indicators. We refer to JP Morgan’s model that is tracking an almost 7 mbd contraction in global oil demand in March.

Many economists previously assumed that Euro-area activity would bottom 15% below its normal level in March and April. The incoming data from Italy this week, where activity troughed at around 80% of the pre-epidemic levels, supported the view.

However, the French statistics office suggested industrial activity in the country is running 52% below normal this week based on information obtained from industry representatives at the branch level. The construction sector has been hit very hard, with activity collapsing to 89% below normal levels this week. The French government instituted a national lockdown on March 17, but unlike Italy, the authorities opted to keep the factories operating. The statistics imply that the hit to industrial activity has been extremely large (French statistics office estimates huge 35% hit to activity this week, Brun-Aguerre, 26 March 2020). This compares to the 60% utilization reached by China at the bottom of its massive quarantine imposed in the first two weeks of February.

Adjusting for lower industrial activity in France, our model is now tracking a contraction in global industrial demand of 273 kbd in March and 1.4 mbd in April.

Global air traffic this week is tracking 60% below last year’s levels. We peg the loss to global jet fuel demand at 2.2 mbd in March, followed by 3.3 mbd in April.

Many commodities strategists estimate that with no other countries added to the lockdown list, 14% of global oil consumption could be wiped out in April. If the rest of the world were to institute a complete lockdown, this number could rise to around 23%, worth at least a $20/bbl hit to price.

Hence, we advocated shorts in CME WTI futures contracts of far-month tenors with a view to arresting further dips, since further price dips are foreseen we would like to uphold the same strategy by rolling over these contracts for May month deliveries. Courtesy: JPM