Scraping the barrel
Oil prices opened the week soft as sentiment around the Covid-19 virus, and prospect for the world economy, waxed and waned. Still, buyer demand picked up vigorously into the New York Open; after all, it’s hard to be ragingly pessimistic when lockdowns are lifting in the next couple of weeks.
Oil fundamentals are finally showing signs of improvement and prices are reacting positively, assuringly accelerating higher as supplies have started to decline quickly with signs of demand improving even as major economies are in the nascent stages of reopening. And while a shift into deficit is likely still weeks away, it could be accelerated by pent up retail demand as consumers will be eager to get back in their cars again.
The US. producers, especially the independent oil producers, have capped their wellheads at a much faster pace than expected. And with voluntary curtailments in G- 20 producers – notably the US, Norway and Canada – kicking in at precisely the right time as economies reopen, that too is having a great impact on prices.
One slight wobble on the legislated curtailment front is that the idea of the Railroad Commission of Texas putting quotas on oil production is "dead" in the water. But given US organic production cuts are visible and well-entrenched, according to the recent Baker Hughes oil rig data, the negative fallout from Railroad Commidiont might only provide a minor hiccup at this time.
The industry as a whole will heave a sigh of relief with supply moving in the right direction and demand picking up – even before a US grand reopening gas buying splurge kicks in as June WTI is set to close +$ 1 above April 20 (WTI 20.27). That was the day before the sharp drop that saw nearby May futures plunging into negative territory for the first time in history. Filling that gap is not only a significant sentiment booster but suggests markets are trying to carve out a new baseline equilibrium at higher prices. And, confirming the improving vibe, the energy sector was one of the biggest gainers of the day in the S&P500, led by Exxon Mobil Corp and Chevron Corp.
While the current run of economic data remains predictably weak, with economies around the world reopening that data should markedly improve. The only thing possibly preventing prices from jumping higher is storage constraints as, with economies reopening across the globe, one would assume refineries would love to stock up oil at these deeply discounted levels. But with onshore tanks brimming and floating storage expensive, it's a bit of a deterrent given there are numerous hurdles to clear before a broader and more extensive oil price recovery takes place, none more so than to what extent the economic recovery post-Covid-19 melds.
With the market rebalancing now in full swing, traders will also start the challenging task of positioning for a multi-staged pickup in demand, 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.
The contangos are flattening as traders move in on weakness, gingerly buying Brent time spreads to capture the eventual shift of the forward curve into backwardation. The subtle change in the curve overnight is sending out positive signals, suggesting it now appears likely the US oil market cleared its primary hurdle on storage capacity issues.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll