Oil markets may stay imbalanced – even after the Coronavirus passes. The oil markets have suffered dramatically as lockdowns destroy demand for the black gold. In their latest monthly oil report, OPEC predicts a 9.1 million barrels per day (mbd) demand contraction in 2020, to 90.59 mbd. This is on the back of OPEC and non-OPEC participants agreeing to unprecedented supply cuts, currently totaling 14.48 mbd.
However, suppliers can't just "stop supplying" oil, nor are they incentivized too. Closing off oil wells may cause irreversible damage or worse, making the reservoir basically useless. "The longer a reservoir remains out of operation, the higher the chance that changes in pressure, water content, and residue clogging will affect future output," said Vitaly Yermakov to Bloomberg, a senior research fellow at the Oxford Institute for Energy Studies. Suffice to say, it takes time and money to restrict supply; therefore, suppliers really, really do not want to do so. Nevertheless, the de-facto leader of OPEC, Saudi Arabia, seems to be keeping up their end of the bargain and more. Saudi Announced a further 1m/bd cut on top of their 3.8 mbd cut in April.
That was a long-wounded way of saying it takes some time for oil suppliers to cut supply; therefore, it has not been able to react to the sudden demand shock that the oil markets have experienced. This has caused a massive imbalance of supply and demand, causing significant concerns with regards to storage capacity. This was part of the reason as to why WTI futures expiring in April went into negative for the first time.
There is tentative evidence, however, that this storage is easing up. The EIA release data showing US stockpiles unexpectedly dropping by 0.745 million barrels, compared to forecasts of a 4.146 million rise. Similarly, to how it took time for supply to react to demand, it may take time for procurement to pick up as demand picks up again.
With the EIA predicting demand to outpace supply by Q3 2020, an imbalance in order is predicted to outpace supply. Since oil is a spot asset alongside the fact that the short to medium turn effects due to the Coronavirus is extremely difficult to forecast, traders have been cautious about going long on the commodity. That does not mean speculators have taken advantage of the low prices. OPEC stated that "despite a significant decline in oil prices, hedge funds and other money managers firmly raised their combined futures and options net long positions" with "speculators inreasing their net long positions in WTI to reach their highest level since January this year."
However, this imbalance may soon shift in the oil producers' favor. Forecasts from the EIA and OPEC with regards to oil demand remain relatively prudent, with one crucial underlying assumption: consumers of oil do not change their behavior. Demand for Jet fuel may be down, but that only represents 8% of the daily global demand for oil pre Coronavirus levels. This is in comparison to gasoline, which makes up 23% of the daily global demand. Predictions of expensive overseas business trips being replaced with free Zoom video calls may be getting traction. Still, there is a high likelihood that demand for gasoline will increase for one specific reason: people fear they will contract the Coronavirus while they are on public transport.
Let's do some quick back of the envelope (and frankly, quite rudimentary and crude) math's here. I'm from Auckland, New Zealand, so I will use us as an example. There were over 22 Million passengers who took the Auckland Transport Metro train service in 2019. On Average, that is 60,274 passengers per day. Over 77% of New Zealanders are over 18, therefore can have a drivers licence - (My brother is over 18, and he does not have his drivers licence) so for prudence sake ill say 60% of New Zealanders have their drivers licence. Lets assume then, 60% of the average daily passengers can drive. That leaves us with 36,164 passengers. There are over 3.5 million registered cars in New Zealand. This means with a population of around 4.9 million, there are over 0.7 cars per person in New Zealand. If we then apply this is 36,164 passengers figure we got, we get about 25,315 individuals with a vehicle – which is around 0.04% of New Zealand's population. If we scale that up to the world's population, that approximately 31.2 million people in the world that take the train, that has the opportunity to drive instead of taking the train.
Phew. Okay. So, the average car takes around 0.35 barrels of fuel. Therefore if 31.2 Million people globally drive, instead of taking the train - this would equate to approximately 11 Million Barrels of extra oil demand.
Sure, the maths is quite arbitrary – however, this does not consider other forms of public transport, such as the ferry or bus. James Li, a public relations account director told Bloomberg that he would rather sit an hour in Beijing traffic than 30 minutes exposed to crowds on a train. Patrick Pouyanne, CEO of French oil giant Total SA also told Bloomberg that "People are using more of their cars because they are afraid to use public transport." Tentative signs for this are showing Apple Maps data for 27 world cities showing that more people are driving cars than taking public transport as lockdowns ease. Furthermore, with places such as New Zealand closing their borders off and airlines operating at 60% capacity to adhere to social distancing rules, domestic road trips may be the only alternative for people who do not want to pay the high price of domestic air travel.
It is yet to be seen whether oil will bounce back to fiscal break-even levels for oil-producing countries. But this potential catalyst for an increase in gasoline may help the oil markets grind back to its formal glory.
Anish Lal, an analyst here at Blackbull Markets has an excellent video about the reasons to be bullish on gold. You can watch the video here.