FxWirePro: Spotlight On Crude Oil Demand/Supply Equation And Hedging Strategy

Eurostat reported Euro area retails sales recently, confirming that the region’s automotive fuel consumption dropped by 20.8% m/m in March. The weak fuel consumption data has prompted us to further cut our European road fuel assumptions for both March and April, deepening our global demand loss estimates for the last two months. 

More specifically, we now see total demand from the road driving sector in Europe dropping 21% yoy in March and 42% yoy in April. This compares to our previous estimate of 10% and 26% yoy declines, respectively, which were based on an assumption that European road fuel losses would be relatively lighter compared to what we observed in China. 

On the contrary, it now appears that Europe seems to be closely tracking China, where we estimate road driving fuel demand bottomed out in February about 46% below year-ago levels. This hit to European gasoline and diesel demand further strips about 750 kbd from our March projections and around 1.2 mbd from April, resulting in an updated estimate of 75.3 mbd for global oil demand in April, marking a peak decline for the year of 24 mbd yoy. Despite the lower nadir, for now we have not made any adjustments to our estimates from May through the balance of 2020, still seeing a recovery beginning this month with global oil demand averaging 81.7 mbd, a yoy decline of 16.9 mbd.

On the production side, announced price-related US oil production shut-ins are tracking 660 kbd in May, up from about 320 kbd in April. This compares to our forecast of 1 mbd of total shut-ins in the US in May. By basin, 250 kbd of production has been curtailed in the Bakken, followed by 220 kbd in the Permian. Gulf of Mexico accounts for another 100 kbd, followed by 60 kbd of closures in the Eagle Ford and 20 kbd in Denver Julesburg. Feeding the US numbers into the global supply balance, we track almost 1.6 mbd of production shut-ins globally. We track an additional 500 kbd of production closures due to virus-related containment measures.

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