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Crude Oil Gain on Hopes That Opening Economies Will Expend Stockpiles

Crude Oil Gain on Hopes That Opening Economies Will Expend Stockpiles

Published: May 19th, 2020

 Oil markets open the week on a high note following optimistic signs that most economies may start gradually reopening in June. This optimism comes on the backdrop of a steady increase over three consecutive weeks. U.S. crude was up 7% on Friday to record the highest price since March. West Texas Intermediate (WTI) exchanged at $29.43 a barrel while Brent crude closed the week at $32.50.

U.S. crude prices leaped by more than 7% at the close of last week to record the highest price since mid-March. The price increase is a result of the strengthening demand for the product as most countries ease the lockdowns measures they had earlier imposed to help tame the spread of coronavirus.

Brent crude gained 5.2% in the week while the biggest gainer, U.S. crude recorded an impressive 19.7% increase week-on-week. Oil prices have maintained a steady climb for three weeks in a row.

According to Bob Yawger, Mizuho Bank’s director of energy futures, this is the first time since late February that the second-month contracts for U.S. crude have traded at a discount. This implies that there is market tightness, Yawger said.

Yawger said that it is not strange that the ascension the markets are witnessing did not start until after the storage at the New York Mercantile Exchange (NYMEX) delivery site in Cushing, Oklahoma, as well as the Energy Information Administration (EIA) crude oil storage, posted their initial storage draws in more than five weeks.

OPEC Cuts

In mid-April, the Organization of Petroleum Exporting Countries (OPEC), Russia as well as a few other countries that produce oil reached an agreement to cut down oil production by almost 10 million barrels per day or 10% of the global supply. The cuts helped tame the runway glut that saw the WTI May contracts plunge deep into the negative territories.

Data shows that the crude oil use in China rebounded in April after the Asia country eased lockdown restrictions it had enforced to counter the spread of coronavirus. Refineries heightened operation as a result but with a cautious approach because of the uncertainty surrounding the discovery of the coronavirus vaccine. Besides, several countries were reporting pockets or reinfection in areas where lockdown restrictions had been eased prompting health experts to encourage even stiffer lockdown measures.

Commerzbank says that the situation has since stabilized. In a note to customers, the bank said that oil prices have stabilized since Saturday, May 16 following a better analysis of the situation that the International Energy Agency (IEA) did.

Industry Predictions

The IEA predicts that the global crude oil inventories will fall by some 5.5 million barrels per day in Q4 of 2020. The prediction puts the demand for the product at about 9 million fewer barrels per day in 2020 compared to 2019. So far, production by non-OPEC members is down about 3.2 million barrels per day less according to IEA.

Barclays Plc that had apprised the price of oil before CORVID-19 revised its prediction up by between $5 and $6 per barrel for 2020 and up to $16 per barrel in 2021. According to this new forecast, Brent crude will average $37 a barrel in 2020 while the WTI will manage a modest $33 a barrel. The bank foresees Brent averaging $53 in 2021 while WTI will attain an aggregate price of $50 a barrel.

According to the bank’s top executive, the true situation may take time to correctly predict because of the unprecedented state created by the current health crisis. Amarpreet Singh who is a vice president at Barclays and the head of oil strategy said that the utter size and pace of disruption will take time to grapple with.

Mid last week, EIA said the U.S. crude inventories plunged unexpectedly reducing the risks associated with the fall in the June contracts that are set to expire on Tuesday, May 19.

These sentiments are shared by John Kilduff, a senior partner at New York’s Again Capital Management. Kilduff says that the drawdown recorded by the various storage facilities makes the situation less perilous than it was ahead of the contracts’ expiry last month. The mere fear of shortage of space drove the contracts into the negative territory for the first time in history.

Markets’ Mixed Sentiments

Despite the steady rise, Kilduff said that the market participants remain fidgety about the nearing expiration date. Despite a record cut in production by about 10 million barrels per day by OPEC+ and further cut promised by Saudi Arabia, UAE, and Kuwait, fear still surrounds the fate of the tens of huge tankers filled with oil that is headed for the U.S.

Despite the skepticism, the price increase seems to go on unabated. During the morning trading session on Monday, May 18, the WTI contracts for June delivery rose by 12% to a two-month high.

Paola Rodriguez Masiu, a leading oil market analyst at Rystad Energy said that the impressive performance witnessed is because producers are throttling back output substantially to correspond with the increasing demand.

Masiu adds that the oil situation may be the easiest to sort out in the long run because the meager demand and the unattractively low prices made slicing production a lot easier than had been anticipated.

The U.S. has cut production by about 1.5 million barrels of oil per day. The rising prices, notwithstanding, the deep dive took its fair share of casualties. With forecasts predicting that the production cuts will remain in place until well

inside 2021 if the prices are to firmly remain on an upward trajectory, smallholder producers are under the threat of going under.

Shale, more so, remains under pressure and many of the outfits expected to file for bankruptcy in the near future mostly emanate from the U.S. shale oil industry.

In Summary

The major crude oil benchmarks witnessed record improvements as oil prices kept an upward trajectory for three weeks in a row. The demand for oil occasioned by the opening up of economies that have been on lockdown following the spread of coronavirus is expected to push the prices further up.