Scraping the barrel
The resumption of the trade war will be detrimental to oil prices over the long term. Still, with demand devastation plumbing the depths, any signs of re-balancing – either through economic re-openings or additional forced or agreed upon supply cuts – should ultimately be views supportive for oil prices at current levels. But with investor sentiment wobbling out of the gates today as risk rises in the East, oil traders will be extremely tentative to build up that bullish muster in exceptionally low liquidity open this morning.
Last week, oil fundamentals were finally showings signs of amelioration, likely accelerated by the recent epic collapse in prices. After all, when it comes to commodity market re-balancing, there’s nothing like low prices to cure low prices themselves.
Supply has started to decline quickly, with signs of demand improving even ahead of reopening measures. While the modulation into a deficit is still a few weeks away, it now appears likely that the market cleared its primary hurdle on storage capacity issues.
Traders are now speculating, with supply moving quickly in the right direction and a gradual improvement in the demand outlook due to economies reopening around the word, that oil procurement may have reduced promptly enough to throttle the race to the storage tank tops.
Baker Hughes reported on Friday that the number of oil and gas rigs in the US fell again this week by 57, falling to 408, with the total oil and gas rigs sitting at 582 fewer than this time last year as US drillers continue to be squeezed between oversupply and under demand. The data provides the most visible and immediate signpost that organic US supply cuts are quickly taking effect.
In the previous seven weeks, oil and gas rigs combined have shed a total of 384 platforms.
Also, The Texas Railroad Commission (RRC) will once again take up the concept of invoking pro-rationing on oil production at its conference on May 5, a proposal brought forth by Commissioner Ryan Sitton. And with supply moving in the right direction (lower), a yes vote could provide a significant boost to US oil prices as domestic with fundamentals are showing nascent signs of re-balancing after a second straight week of inventory and product demand figures falling. This suggests an RRC affirmation would no longer be viewed as a "too little, too late" approach.
Commissioner Wayne Christian, the RRC's current chairman, stated last Wednesday that he would not support the plan. So, assuming Commissioner Sitton supports his proposal, that will leave Commissioner Christi Craddick with the deciding vote.
The news that Norway will contribute to the OPEC+ agreement with production cuts lasting through 2020 was positive for sentiment last week, as was the announcement of significant curtailments (net 230kb/d in May and 420kb/d in June) from ConocoPhillips.
Traders may soon start positioning for similar announcements from other major producers to trickle in over the next few weeks. And with supply moving in the right direction, and significant economies reopening around the world, it suggests we could rapidly be nearing that WTI $20.27 inflection point.
That was closing print on April 20 the day before the sharp drop that saw nearby May futures plunging into negative territory for the first time in history. A daily close above that level might suggest the market could gravitate to a baseline equilibrium at higher prices.
With the market re-balancing now in full motion, traders will also commence positioning for a multi-staged tightening cycle, first led by retail and industrial consumption then, at a later point, aviation fuel demand as travel restrictions will likely be at the tail end of the reopening process.
With oil futures now pricing in a less likely chance of storage saturation, the Brent crude rally can extend further in May and pull WTI along for the ride, albeit with still a high level of price volatility.
We could see contangos flatten more as traders start to go long Brent time spreads positions to capture the shift of the forward curve into backwardness which could also buttress sentiment.
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot