FxWirePro: How Does Demand/Supply Equation Impact Crude Oil? Run Through On WTI Hedging Outlook

On the production side, we have removed a cumulative 2.3 mbd for May- June. Saudi Arabia (1 mbd), UAE (0.1 mbd) and Kuwait (80 kbd) account for majority of the production downgrades in June. In the US, we raise our expectations for May US crude and condensate production shut-ins to 1.3 mbd (originally 1 mbd) driven by the increasing transparency from the US upstream community during the 1Q20 earning season. Genscape reports announced shut- ins for May currently track at 1.2 mbd, driven regionally primarily by the Bakken, Permian and Gulf of Mexico. We continue to hold our estimate of 1.5 mbd of production curtailments in June and have trimmed back our July shut-in expectations by 500 kbd to 1 mbd.

All the while, we continue to downgrade our demand assumptions. As we get a clearer picture of where activity likely bottomed last month, in total we have stripped another 2.2 mbd of oil demand from April and an additional 2.9 mbd from May too as we temper our assumptions of a rebound this month. We now see global oil demand bottoming out in April at 73.1 mbd, 26.2 mbd lower yoy, and rebounding about 8% mom to 78.8 mbd in May, still marking a yoy contraction of 19.8 mbd this month. FY 2020 oil demand is now forecasted to average 90.4 mbd, or 9.5 mbd lower yoy.

From a geographical perspective, we have made the largest downward revisions to India in the last week, cutting a massive 1.3 mbd from our April assumptions after the Ministry of Petroleum & Natural Gas reported the country's consumption of gasoline, diesel/gasoil and jet and kerosene had dropped 60.4%, 55.5% and 79.4% yoy, respectively, last month to levels well below our previous estimates. Looking forward, Indian demand is expected to grow by as much as 25% mom in May according to reports citing local refineries. We incorporate this expected bounce bust still strip around 1 mbd from our May estimates given the lower bottom in April.

As more and more countries are loosening restrictions, driving activity has definitely bottomed for now but recovery will be slow. High-frequency mobility tracking data from both Google and Apple indicate that global driving activity (weighted by road fuel consumption) averaged between 35% and 40% below a baseline normal over the first week of May. This compares to a low of between 47% and 55% below normal at peak disruption in early-to-mid April, depending on the exact data source. We have further calibrated our driving activity assumptions across all regions based on the latest mobility tracking data which drive the majority of the other demand revisions this week, particularly an 800 kbd cut to European driving demand in May given a slow emergence from lockdown.

On net, our supply/demand model still shows the first month of global deficit will occur only in August. Heavy demand downgrades in March through May mean we still see 1.7 billon bbls of cumulative YTD inventory overhang by August vs. an estimate of 1.6 billion bbls previously, despite the additional supply cuts. 

OPEC and its allies want to maintain existing oil cuts beyond June when the OPEC+ group is next due to meet to shore up prices and demand, which has been hit by the coronavirus pandemic, four OPEC+ sources said recently.

We recommend shorts in CME WTI futures of July’20 delivery for the major downtrend, simultaneously, long hedges of CME WTI of June tenors. Thereby, one can ensure directional positions amid macroeconomic turmoil. Courtesy: JPM

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