Home / Blog / Market Analysis / Asia Open | Oil: In the absence of a vaccine the runway to a recovery could be full of potholes, prone to fits and starts, and hit by wobbles before liftoff.

Asia Open | Oil: In the absence of a vaccine the runway to a recovery could be full of potholes, prone to fits and starts, and hit by wobbles before liftoff.

Market Analysis / 2 Min Read
Stephen Innes / 26 May 2020

Scraping the Barrel

On the supply side of the equation, the worst is behind us due to the high level of curtailment in the US shale output. But the same cann’t be conclusively said on the demand side of the equation as trade war risk lingers and with the real rally showstopper – a second wave outbreak – a distinct possibility that could turn oil prices lower on a dime. Ultimately, over the near term, the latter will limit the oil markets' topside ambitions. 

Governments will need to calibrate by strictly phasing in economic reopening and could be forced to lock down parts of the countries against the risk of relapse in virus case counts if the data warrants. 

Still, the initial phase of policy loosening may yield further demand upside for oil. As such, this week's US inventory will be scrutinized to support the market’s relatively optimistic view of supply/demand fundamentals for oil. There’s little ambiguity that US production has fallen much more rapidly than expected, likely a function of voluntary curtailments by producers choosing to hold back for a better price environment and involuntary shut-ins due to low oil prices.

But looking at the bigger picture for oil, the key concern for the next few months will be on the demand side. And while thus far it appears traders were right to call a floor in global demand in April, oil prices will remain sensitive to negative news flows – especially as they hint that the easing of global lockdowns might result in a second wave of Covid-19 infections and, therefore, a more protracted impact on demand. 

Traders are extraordinarily cognizant and extremely nervous about a secondary spreader. And unlike other risk assets, like stocks, which are traded on a six month or more, forward-looking basis and are supported by incredulous amounts of fiscal stimulus, oil is traded on the spot markets and doesn’t have that luxury. Hence, it’s impossible to paper over demand falls. 

And while we could expect that the world to face an enormous wave of oil price inflation once the economy returns to pre-pandemic all-systems-go, as the incomprehensibly-large global stimulus efforts will tailwind the oil price rally, as we saw in 2008/2009 the path from government intervention to asset price inflation is initially dangerous and rocky.

Indeed, in the absence of a vaccine the runway to a 'coronavirus crisis’ recovery could be full of potholes, prone to fits and starts and hit by wobbles before liftoff.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

 

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