Commenting on the impact of collapse in oil prices to 20-year lows

Commenting on the impact of collapse in oil prices to 20-year lows

Mayank Joshi from Chatham Financial, said: “The recent collapse in oil prices to 20-year lows has landed us in a range which is new for several fuel managers and traders in the energy space. While we saw sub-30 $/bbl oil briefly during the previous collapse in 2015/16, the market is fundamentally different this time around with significant demand destruction due to the Covid-19 situation.

“There are various reports out there on the magnitude of demand destruction for next few months, but the true impact is probably hard to asses and ever changing as more and more lockdown measures are being announced globally. If the current situation continues, Sovereigns will continue to pump as much as they can to support their economies while higher cost producers, especially in the US, may need to shut down at some point in the near future. Any emergency intervention from the supply side (OPEC+Russia) looks unlikely and would probably fail anyways due to weak demand expectations in the near term.

“The average consumer at the pump would normally benefit from such a move, and so would the transportation sector – but again the lockdowns mean no one is burning much fuel for starters. Transport names who actively hedged are probably the worst hit as they are losing revenue and may also be writing big cheques on their hedges at the same time. Some of the biggest importers of oil such as China and India may see some relief if they recover from the current situation early. However, India has announced a 21-day lockdown – so they won’t be burning much oil anyways! All these issues suggest that unlike 2016, low oil prices are likely to persist for a while.

“Liquidity is likely to be an issue as well in the oil financial markets with consumers who are active hedgers busy dealing with commercial issues or having no certainty on forecasts, producers not interested in locking in current levels and with traders remoting from home as well.

This lack of liquidity also implies that we may continue to see significant intraday volatility as well. For consumers who have not hedged in the recent past and expect a V-shaped recovery, the market may look attractive to place some hedges despite a strong contango in the forward curve (upward sloping forward curve).”

chathamfinancial

Source / More information : Chatham Financial

Submitted by: Jamie Brownlee, Greentarget

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