Although risk appetite was indecisive overnight, oil markets liked the positive news from China regarding its Covid-19 outbreak, where a senior epidemiology expert at China's CDC said Beijing's outbreak had been contained.
This reassuring news comes as infections in this cluster reached 150 cases and authorities had prevented some people from leaving the city. In the US, however, the deteriorating situation in states like Texas, Florida and Arizona remains a concern and has likely tempered enthusiasm.
Staying consistent with my views this week, to push through the WTI $39-40 level we may need to see a bullish double-hitter in the form of flattening US case counts and a draw in US inventory reports. The later could happen next week due to the Cristobal effect, while the former could be a week or two away. That said, if the spread in the US continues to rise slightly after that, it could negatively affect consumer spending behavior and impact oil via falls in mobility data if people stay at home and don’t use their cars.
WTI prices are inching near the $39 level which is a critical spot for oil; $39-40 zone is speculated to be a target that could encourage US shale producers to turn up the taps. However, the EIA inventory data was more supportive of prices than the earlier API. But, again, it showed up the continuing lagged impact of April Saudi production increases landing on the Gulf Coast while the implied production figure is falling as the adjustment factor comes down.
A feature of the recent OPEC+ agreement was a monthly review of compliance and the JMMC yesterday. Reportedly, Iraq and Kazakhstan presented plans for meeting quotas and compensating for historical over-production and, as we stated yesterday, OPEC announced May compliance as being at 87%.
While the news about Iraq and Kazakhstan is positive at the margin, the focus remains on the two most significant contributors to the OPEC+ agreement: Saudi Arabia and Russia.
Currently both countries continue to sing from the same song sheet, highlighted yesterday with Russia's Energy Minister commenting on the speed with which Russia delivered on its commitment to the OPEC+ agreement.
Oil is supported today by signs of improving global demand and a US inventory build smaller than reported earlier this week by the API. Still, the markets remain tempered over the near term, given growing concerns about an increase in Covid-19 infections stateside and the potential negative catalyst of rising US onshore production.
Asia oil price action yesterday was bewildering again as it has been all week, perhaps a result of localized jitters from the small outbreak in Beijing. But this week has presented a panacea of opportunity for long term strategic oil buyers. They’ve steadily remained dip buyers, believing wholeheartedly in OPEC delivering a healthy dose of medicine to the ailing oil markets – namely that the novel principle of compensation would be introduced for the first time in OPEC's history.
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