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As lockdowns ease the first signs of real oil demand recovery are here
“Is this for real?” seems to be on the lips of all oil market analysts since crude began its climb into the $30-plus per barrel range.
And while some say it is based on solid numbers, almost all agree oil markets are reactionary - if pandemic related lockdowns re-emerge, prices will drop.
Still, the oil price, with only few stumbles, stubbornly continues to rise. Even Alaska North Slope crude, which has remained consistently lower than Brent for the first time in several years, reached $33.32 at the close of trading on May 20 - $1.42 higher than the day before.
So, what’s behind the increase, the beginning of the rebalancing of the oil market? Producers in the U.S. and Canada have cut more oil production than they disclosed; OPEC+ producers, including Russia and Iraq, are largely and surprisingly abiding by their production reduction agreement; and China-led Asian demand for oil is up. In fact, in China demand is almost back to where it was a year ago. Plus, three OPEC members - Saudi Arabia, Kuwait and the United Arab Emirates - have said they will make even deeper cuts than promised for June. All of which means multiple crude streams can get dollars-per-barrel premiums relative to the benchmarks they trade against, when just a few weeks ago they were being sold at deep discounts.
The International Energy Agency attributed faster-than-expected production cuts by companies and countries for the steady increase in the price of crude.
Gap in reportingEd Morse, global head of commodities research at Citigroup, told Josh Siegel in an interview that appeared in the May 19 Daily on Energy in The Washington Examiner that the U.S. Energy Information Administration is not reporting the actual amount of production that has been cut.
Most projections, Morse told Daily on Energy, are based on announcements by producers, and are thus reporting U.S. output cuts between 1 million to 1.5 million barrels per day. But pipeline companies are reporting higher shut-in numbers, he said.
In an earnings call tagged by Javier Blas, chief energy correspondent at Bloomberg, Plains All American Pipeline said shut-ins in North America have peaked as high as 4 million barrels per day, Daily on Energy reported.
Bleakest spotThe “bleakest spot” for oil price recovery is the U.S. Gulf Coast, where a flood of exports from Saudi Arabia has added to an existing surplus. Onshore, West Texas Sour crude has dropped to a discount of 35 cents a barrel below WTI futures, down from a premium of $3.50 as recently as May 11, Bloomberg reported May 20.
“In the very short-term, prices may have accelerated a bit too fast,” Eugene Lindell, an analyst at JBC Energy GmbH in Vienna, told Bloomberg. “The situation on the refining side is pretty brutal right now,” but it could prove positive for sellers if they maintain supply discipline, Lindell said. JBC is “ultra bullish” beyond the next two or three weeks, because the production curtailments will make the global market “seriously tight,” he said.
Slightly better airline newsWhile easing lockdowns in parts of the U.S. has sent gasoline sales soaring, there is also some good news from the beleaguered airline industry that bodes well for jet fuel sales.
Blas tweeted May 21 as this issue of Petroleum News was going to press: “The aviation industry remains in the doldrums, despite (upward arrow) in recent days. According to @flightradar24 there were ~39,000 commercial flights yesterday (passenger and cargo), highest in nearly 2 months. Pre-crisis, a normal day saw ~100,000 flights.”
A day earlier Bloomberg and other news services reported that Delta Air Lines again increased the number of flights returning to service this summer to allow for social spacing among passengers as demand increases - specifically, Delta will add 200 flights in June and possibly more in July, CEO Ed Bastian told Fox Business News.
And United Airlines’ new CEO Scott Kirby said on CNBC that United is moving to larger planes to allow for personal distancing on flights, and, per Bloomberg, he “eased his tone on job cuts.” The airline recently reported “moderate” strengthening in the U.S. and on some international routes.
Southwest Airlines also said that bookings are growing faster than cancellations. and reservations for June are showing “modest improvement.”
Reuters reported May 21 that British airline easyJet plans to restart some flights on June 15.
Where are oil prices going?So, what’s next for oil prices?
“Global supply has been curtailed to a great degree,” said Rystad Energy senior oil market analyst Paola Rodriguez Masiu. “We are on a clear path to a gradual recovery now.”
“It is now abundantly clear that the market is tightening, and crude prices are rebounding as demand returns,” said analysts at JBC Energy, per a May 21 Reuters report.
“Who would have thought that only a few weeks after hitting sub-zero, oil prices would stage a solid recovery back towards the $30 region?” Lukman Otunuga, senior research analyst at FXTM, told MarketWatch. “With economies easing lockdown measures, oil could edge higher in the near term,” he said. “However, gains may be capped by global growth fears and renewed U.S.-China trade tensions.”
“The crude oil stock draw was unexpected, but it is attributable to declines in both imports and production, while refinery inputs were higher,” Marshall Steeves, energy market analyst at IHS Markit, told MarketWatch. “Overall, storage isn’t filling up as quickly as expected with the steeper production cuts rebalancing the physical market.”
“Arguably, the most robust factor for oil markets now comes from the US. Though the country is prohibited by law from engaging in any production cut deals or so-called price fixing, much to the dismay of OPEC kingpin Saudi Arabia, a number of US oil players including heavyweights ConocoPhillips, Continental Resources and Chevron are taking matters into their own hands. They are all shutting down production in order to first dry up the severe ongoing supply overhang that is rapidly filling up storage levels, and to give upward support for beleaguered prices,” reported Tim Daiss, Asia Times, on May 20.
“Simply put, OPEC+ led production cuts and global shut-ins are working,” RBC Capital Markets analyst Michael Tran wrote in a research note.
The bank had been expecting oil markets to flip into deficit by late June or early July, but “preliminary indicators are suggesting that balances are cleaning up four to five weeks ahead of our anticipated timeline, as are prices,” he told Bloomberg.