Rystad Energy’s daily market comment from our Head of Oil Markets Bjornar Tonhaugen: 

The oil market was looking for something to hold onto after days of painful declines in prices and today found some relief in developments in the US.

Threats by US President Donald Trump to destroy Iranian gunboats if they harass US navy ships boosted the possibility of renewed tension in the Middle East, a major oil producing region, which traders always translate to reductions in the region’s production and exports if things escalate.

Prices also saw a boost as US crude stocks last week did not build up by the heavy amounts the market believed, as a decent amount of crude exports was still going out of the US Gulf. Build ups will increase however, this is clear, and the market will feel it as we move towards the end of April.

Crude demand from US refineries is more than 4 million bpd below the same period last year with more downside ahead as gasoline storage gets exhausted. Oil prices will see continued downwards pressure before long because the physical oil market is building stocks at a pace never seen before.

The pace will only simmer down marginally in May as the world’s lockdown measures remove oil demand to the tune of 21 million bpd in the second quarter of 2020, 7 million bpd of which is gasoline.

Another bullish factor which helped prices today is regulatory, as Oklahoma’s regulator moved to assist producers in shutting their wells without losing their leases, a relief for producers that want to cut some output but were hesitating due to regulatory consequences. However, even if states don’t help, there will be shut-ins no matter how you turn it, market forces would cause them anyway. US production is also going to decline due to well declines, but there are indications that some small shut-ins have already occurred too.

The Eurozone’s PMIs that just came in are really bad though, much weaker than expected, and may turn the market sentiment lower again today before long.

As we move towards the physical limits of storage, oil prices, which can of course see some light boosts along the way due to geopolitical tensions, Tweets and other factors that create some temporary hope, are set to decline  due to fundamentals.

A price boost that is partly based on anticipation for tensions in the Middle East, is artificial and its ground is theoretical. It will break again, when things calm down, as they usually do despite the strong Tweeted statements.

The only concrete development that could give prices a boost that can last is either a rebound in demand, when lockdowns are scrapped and industrial activity ramps up, or a generous and unprecedented production cut, in addition to what OPEC+ decided.

If that doesn’t happen a series of shut-ins is coming, the size of which can shock the market and force supply down in itself. And they are overdue!

Producers at the moment try to keep production on but will eventually realize they need to shut-in some output, maybe when they don’t have any more place to store their oil and start looking for spare jerrycans.