Scraping the Barrel
With driving season underway, oil traders are jumping on board the bullish optics from the mobility traffic data as congestion around the world's major urban centers is encouraging investors to skew their outlook to one of much-improved demand.
Also helping the bullish cause is Russia confirming it has almost hit its OPEC+ production quota. And boosting the supply curtailment view was the Baker Hughes rig count, which recorded oil rigs down practically 10% to 237, with 2/3 of the decline in the Permian. Money managers are also getting on board with net long futures and options recorded in the CFTC COT data for the week to 19 May, up 23,229 to 380,211 contracts.
Russian Energy Minister Alexander Novak added to optimism that has supported the oil price recently, saying yesterday that deeper-than-expected production cuts mean supply and demand will balance in June or July. Russia has already cut 2mb/d in May and is making progress toward its commitment to achieving 2.5mb/d of cuts for May-June. Russia has historically been the laggard within the OPEC+ group.
While issues with storage capacity are likely to have accelerated Russian cuts, it’s still good to see early evidence of proper compliance. Risks, however, remain in the near-term – escalating US-China trade tension notwithstanding. Higher oil prices might slow or even reverse production cuts, particularly in the US, as demand remains sensitive to the lingering impact of the coronavirus. Overall, though, positive sentiment seems to be supported by improving fundamentals.
Amazingly, we’re homing in on WTI $35 so quickly. Still, the markets are bound to get incredibly bumpy as the bullish for oil re-opening narrative will continue to get challenged by heightened US-Sino tensions. And with the market cratered with Covid-19 pot-holes left, right and center – as every central banker in the world will be willing to tell you – the market will be prone to lay off risk on rallies as trader try to equate prices against the backdrop of a weak real economy.
If, or once, we get a vaccine in hand, we could expect the world to face an enormous wave of oil price inflation once the economy returns to pre-pandemic all-systems-go levels. The incomprehensibly large global stimulus efforts will tailwind the oil price rally back to pre-Covid-19 levels and beyond. But, as we saw in 2008/2009, the path from government intervention to asset price inflation is initially dangerous and rocky so there’ll be a lot of wobbles before liftoff.
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