March 31, 2020

Unprecedented, Unstable, Uncertain

Sproule Crude Market Commentary

Considering the recent unprecedented events globally, Sproule has outlined key information underpinning the volatility in crude markets, as well as our commentary on where we go from here:

Global Crude Demand

• COVID19 is now expected to cause unprecedented crude demand disruption for 2020, with the most profound impacts likely to occur across Q2.
•  The key sectors impacted are road and aviation fuel demand. With lockdown efforts now spreading from Asia to Europe and North America, the magnitude of disruption continues to grow.
• The exact decrease in demand for 2020 is still unclear, but we know the magnitude will approach levels never seen in recent history. Sproule is currently expecting a demand contraction between 15 and 20 million bbl/d for Q2 as a result of COVID19 quarantine and lockdown measures globally.
• Sproule’s March 31, 2020 crude price forecasts are underpinned by this expectation for significant Q2 demand contraction and global economic activity beginning its recovery later in the year.

Global Crude Supply

• The disintegration of the OPEC+ curtailment agreement and the actions of Saudi Arabia, Russia, and others to increase production is exacerbating the glut of global crude supply caused by the COVID19 related demand decrease.
• Assuming demand growth resumes later this year, the rate of price recovery will be largely dependent on how long countries like Saudi Arabia and Russia decide to maintain increased levels of production, as well as how quickly producers in the rest of the world shut-in production in the near-term.
• With global storage nearing capacity, a global supply response is necessary to prevent prices from falling towards $0/bbl in the coming weeks.
• Post-COVID19, storage inventories will act as a drag on price recovery as crude markets work through record high inventory volumes.

The near-term impact of COVID19 demand disruption will be significant, and we are expecting a period of heightened market volatility. In the face of record demand losses, near-term market pricing depends largely on the supply-response actions taken by producers globally. All this being said, the glut of production expected to accumulate in the second quarter of 2020 and the ramifications of COVID19 on global economies has the potential to have lasting impacts on global crude prices. Ultimately, we know that current spot prices are materially below the marginal cost of supply in a world consuming upwards of 100 million bbl/d of crude, which tells us that current prices are not sustainable long-term. However, substantial supply rationalization to match demand will be needed for stability to return in a rebalanced market. Sproule will continue to monitor the situation and adjust our price forecasts with both the near-term volatility as well as long-term market fundamentals in mind.

March 31, 2020

• WTI
• BRENT
• CLS
• WCS
• HENRY HUB
• AECO
• NBP