Rystad Energy’s daily market comment from our Oil Markets Analyst Louise Dickson

The market started realizing what the impact of the continuously rising Covid-19 cases may be for the US and its oil demand and corrected gains of previous days, returning price levels around the 40-dollar mark.

A second wave of the pandemic has been a downside factor for long time and was not properly priced in, with the market needing a deep shock to ack.

The shock did not come as a single day event. It is the continuous non-stop rise of Covid-19 cases in key markets, with the US meeting a record high number of reported infections yesterday, more than any country has ever reported since the pandemic emerged.

Oil hungry California, Texas, Florida and other US southern states see a new wave of cases and reversed easing of social distancing measures.

Traffic patterns that have been seeing a continuous improvement over the last two months has now stalled and we see again reduced traffic and gasoline demand throughout the southern states and the midcontinent.

Global refineries are expected to maintain high runs, so we expect more pressure on products than crude going forward.

Another surge in Covid-19 cases and lockdowns would be devastating to oil market recovery models everywhere, including ours. In our base case liquids supply-demand balance forecast, the oil market should reach near-perfect parity in July and then stumble its way through a choppy recovery in 2020.

A second wave of the extremely deadly respiratory pathogen Covid-19 would flip the oil market back into the chaos in April and May, albeit the chaos would be more managed and smaller in scale.

At present, producers are supplying the exact amount of oil products the market needs. But after July, things could get messy.

While we have been able to model what a second wave scenario would do to demand, supply is more of a wild card. OPEC+ currently plans to taper down production quotas starting August, but the rest of the world isn’t on a quota regime and with both Brent and WTI above $40 per barrel, many operators, especially in North American shale, are eager to get wells back on production.

Given the volatility that still remains in the oil market – with large supply swings from OPEC+ cuts and compliance, the reactivation of shut-in production in North American, the uncertainty over future Libya crude production – would normally translate into volatility in prices, but since our commentary last week, both Brent and WTI have been solidly anchored in the low $40s.

Even after US inventories built by 5.7 million barrels (bringing stockpiles to yet another record high), traders barely flinched, as it’s just sliver in the nearly 540 million barrels of total commercial US stockpiles.

Our balances would suggest this calamity is related to the very fact that supply and demand are in harmony for the first time in four months.

But should a second wave hits and demand worsen just the moment supply from OPEC+ and North American shale players comes back online, we are in for a very painful rest of 2020.