Scraping the Barrel
Commodity markets and risk assets, in general, performed well overnight as economies emerge from lockdown and vaccine hopes spring eternal. There’s always a chance something good might happen on the medical front with the full weight of the biotechnology industry behind these efforts.
The oil price continued to find support from a combination of positive macro data points and increased refined product demand in China and India so far in May. Improved Chinese industrial activity and pent-up need for gasoline as traffic congestion rose in major cities across East Asia have seen Chinese oil consumption return just shy of last year's levels, suggesting a more optimistic view on oil demand may be justified. Also, lockdowns continue to ease; California's governor reported that three-quarters of the economy is open and European economies have had no reason to reverse lockdown easing so far.
Oil demand is recovering in a more V-shaped fashion than macroeconomic data, and with distillate joining the recovery party, it’s a massive boost. The recovery in the distillate market is providing a fantastic springboard for oil prices. Hopefully, this will soon be complemented by an easing in global travel restrictions, which should eventually see a pickup in the depressed aviation fuel sector.
Apple Maps driving behavior shows US driving is nearly back to pre-Covid-19 levels and shows a positive divergence over public transport use globally. Together with the surge in China's first-time car buyer sales, this indicates a definitive trend emerging as consumers prefer the segregated mobility of an automobile to maintain social distance.
A developmental vaccine from a US biotechnology company is showing positive results, offering provisional support to risk assets. Indeed, the discovery of a vaccine that can be mass-produced would be a watershed moment and the ultimate Covid-19 slayer as reopening and resurgence concerns would fall by the wayside.
A bullish start to the week has pushed crude above $30. This seems partly linked to relief that WTI expiry appears likely to be orderly as open interest has pared significantly.
Traders were rehashing EIA/OPEC/IEA reports, which, on the margin, projected faster falls in non-OPEC production and, importantly, the IEA now forecasts aggregate storage will not brim. With definite signs that the curve is flattering – ignoring the technical nature of the June vs. July backwardation – the market agrees.
The drop in inventory levels has been more the result of a fundamental rebalancing than disruptive front-end pricing, which is a hugely bullish signal. The simultaneous declines in both the national and Cushing inventory, suggests there’s no diverting of crude from Cushing into other storage facilities.
What’s unknown is how much of the non-OPEC reduction will remain in effect if oil prices continue to move higher and compliance within the OPEC+ group endures. Still, both supply and demand are moving in the right direction.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower