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Crude Oil Q3 Fundamental Forecast: Energy Supply Drawdown Begins

Crude Oil Q3 Fundamental Forecast: Energy Supply Drawdown Begins

Christopher Vecchio, CFA, Senior Strategist

Crude Oil Q3 Forecast Overview:

  • Crude oil’s dramatic plunge into negative territory in Q2’20 proved to be the result of a perfect storm of factors: excess production at the start of the coronavirus pandemic.
  • The IEA foresees the global supply-demand balance quickly shifting from a surplus to a deficit from Q2’20 to Q3’20, with global inventories dropping by around 4.5 mb/d through Q3’20 and Q4’20.
  • The fundamentals suggest that crude oil prices will be able to stay elevated between $35 and $50 per barrel throughout Q3’20.

Steep Cuts to Remain, Helping Support Price

In Q2’20, the global supply-demand surplus was 8.5 million barrels per day (mb/d), leading to the fastest build in energy inventory in history. Efforts by energy producers around the world to reduce supply in response to the dramatic demand destruction witnessed in Q2’20 will likely lead to a persistent global supply-demand deficit for several quarters, if not years, which, in turn should prove supportive of crude oil prices (and energy in general).

The IEA foresees the global supply-demand balance quickly shifting from a surplus to a deficit from Q2’20 to Q3’20, with global inventories dropping by around 4.5 mb/d through Q3’20 and Q4’20. OPEC+ has put out more aggressive estimates, however, suggesting that its members will allow demand to outpace supply by at least 7 mp/d through the end of 2020.

All in all, by no means is the global economy finished dealing with the coronavirus pandemic. But shifts in production capacities should prevent oversupply from becoming the issue that it was in Q2’20, now that significant efforts are being made to ensure that demand outstrips supply.

Having found a short-term floor near $35 per barrel by mid-June, the fundamentals suggest that crude oil prices will be able to stay elevated between $35 and $50 per barrel throughout Q3’20 – because if crude oil prices rise beyond $50 per barrel, it becomes highly likely that US shale producers come back online, which will bring otherwise unforeseen supply back into the mix.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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