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Surge subsiding?
Some say all not rosy in the oil price recovery space, but positive signals remain Kay Cashman Petroleum News
After nosediving into the negative in April, oil prices bounced back in May, increasing to $42.46 for Alaska North Slope crude, or ANS, on June 10 in what appears to be a V-shaped recovery.
The reasons for this swift reversal include declining unemployment filings and U.S. employers adding 2.5 million jobs in May, an indication that the economy is quickly recovering from the COVID-19 lockdowns, boosting demand for oil.
Another contributing factor has been oil producers drastically reducing spending to survive the collapse in demand and prices, with speculation that those spending cuts might lead to an undersupply of oil later this year and much higher prices - one prediction of $70 a barrel for West Texas Intermediate crude in a story touted for several days on Oil Price.com.
More than expected production cuts from U.S. oil companies also buoyed prices.
OPEC+ agreeing to continue production cuts in July and planning to review cuts monthly, was another piece of positive news that kept prices moving in an upward trajectory.
The reopening of global economies and expectations of increased activities worldwide also contributed to a fast rebound in prices.
Consumer demand in the world’s top oil importer, China, recovering to pre-COVID-19 levels was encouraging as the country was the first to go into lockdown after the virus appeared in Wuhan, and the first to exit lockdown, setting what analysts expected to be a model for countries subjected to the virus in later time periods.
Second wave of fear Although increases in COVID-19 cases were expected as states came out of lockdown, there has also been very little progress made on a vaccine for the virus. And the fact coronavirus cases are indeed on the rise in in the U.S., fear is growing about a second wave that could erase some of the past month’s economic gains.
Equally important have been recent warnings by a cross-section of Wall Street analysts that traders and investors should be more cautious because there are indications the spike in oil prices is not supported by fundamentals.
Those analysts are questioning whether the increase in demand is the result of rising consumption or simply the result of refiners and traders stocking up on cheap crude, OilPrice.com reported June 10: “ING’s Patterson and Ehsan Khoman at Japanese bank MUFG say the surge in demand could partly be the result of opportunistic buying by refiners. Consequently, Goldman Sachs has predicted that Brent prices will pull back to $35 per barrel in the coming weeks from a recent high of $43.”
In a June 9 analysis Goldman Sachs’ commodities research team led by Jeffrey Currie wrote, “Despite the rally, we have been hesitant to recommend a long position this early in the cycle for several reasons,” one being there is still surplus inventory.
Their note also said, “This is not to dismiss the current recovery or not acknowledge that it is progressing ahead of expectations, but rather note that prices are ahead of the rebalancing where oil still faces a billion-barrel inventory overhang.”
The Goldman team described crude’s rally as “surprising given the massive inventory overhangs and depressed demand faced by energy and agriculture markets.”
Sure enough, in early trading (6 a.m. Alaska-time) on June 11 Brent crude, which tracks close to ANS, started to falter, losing $2.47 and dropping to $39.26 as Petroleum News went to press.
Alex Kimani’s takeaway “At this juncture, it’s best for investors to adopt an attitude of cautious optimism. On one hand, the bulls argue that OPEC+ has curtailed production too fast, with some oil executives eyeing the seemingly untouchable WTI prices of $70 in the current year,” Alex Kimani for Oilprice.com wrote June 10.
“On the other hand, poor refining margins are telling a different story while oil prices have, worryingly, been strongly pulling back from recent highs on fears that increased production by U.S. shale producers and Libya will offset the OPEC+ cut,” Kimani continued.
“As many analysts have pointed out, the biggest wild card in this market remains the speed at which demand is going to bounce back in the coming months,” he said.
Ending on a positive note Kimani said, “The current evidence though appears to lend support to the bull camp.”
Fingers crossed.
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