The oil market is in for a bumpy ride for the rest of the year and despite last week’s historic production cut of close to 10 million barrels a day, oil prices continue to fall.
In Friday trading, Brent crude had dropped below US$28 with West Texas Intermediate (WTI) around US$25 a barrel.
It’s clear that any growth in oil demand will be minimal but news of China’s slowest quarter will not help the situation.
The Chinese economy contracted by 6.8% in the first quarter of the year, according to official data released this week.
China began recording quarterly economic progress in 1992 and this is the first time the country has experienced such a negative fall.
Back in the early nineties, the Chinese economy had been growing at around 15% and recovered well after the 2008 financial crisis. A negative figure of -6.8% has investors and analysts worried that many businesses will fail in China this year.
Retail sales are down more than 15% and unemployment is close to 6%. Factory output was down but China is re-starting some manufacturing operations.
The global economic slowdown has already damaged demand for oil, dragging the US benchmark below US$20 a barrel this week.
There are fears that many smaller shale producers in the US will go out of business in the coming months.
Already, major player ConocoPhillips said it will reduce production by 225,000 barrels a day. This is obviously in response to the fall in price and the lack of demand.
A report this week from Wood Mackenzie said that “the cuts will help soften the blow of plunging oil demand as the effect of lockdown to suppress coronavirus across much of the world bites into the global economy".
Looking at American supply, the report expects that operators will “cut over 100 rigs from the Permian by end May and over 200 across all plays by end June”.
The International Monetary Fund delivered a devastating forecast this week saying that the global economy will suffer its worst year since the Great Depression of the 1930s.
The IMF chief economist said we can expect the economy to shrink by 3% this year adding a cautionary optimistic growth prospect for 2021. The uncertainty in terms of the pandemic recovery will keep the markets nervous in coming months.
The International Energy Agency warned of a period of low demand not seen in the last 25 years. The IEA said oil demand hit its lowest this month, down by more than 29 million barrels a day.
With global transportation on a lockdown this quarter, no-one is expecting a return to business as usual even in the second half of the year. The IEA says it expects “global oil demand in 2020 will fall by 9.3 million barrels a day,” when compared to 2019.
The slowdown in China will also impact oil demand growth and despite any domestic economic stimulus, this looks like a low growth year for China and other countries.
Oil storage continues to be a challenge as facilities around the world are filling up. The global oil market remains over supplied and oil inventories in the US rose by 19 million barrels.
The IEA said that the agreement last week was a “solid start,” but it fears that “no feasible agreement that could cut supply by enough” to offset the impact and damage being done to oil demand by the current health pandemic.
Little is expected to change in the coming weeks to help swing sentiment in the oil sector, but any sense of stability back on the market due to oil being removed will be welcomed.
This will be a challenging rest of second quarter for all oil producers as learning to live with even lower oil prices will be tough.