Crude oil surges higher on hopes of rebalancing of demand-supply

Oil prices are on a rally as producer supply cuts kick in and hopes rise of a gradual normalisation as lockdowns are lifted across the globe.

Crude oil prices fell to record lows amidst a destruction of demand due to the coronavirus pandemic, while OPEC plus producers could only agree to supply cuts effective Friday, May 1.

WTIC June futures closed Tuesday at $ 24.56 per barrel, up $ 4.17, or 20.5%. The contract logged its fifth consecutive run of price gains.

Demand supply rebalancing

Countries across Europe, Asia and elsewhere are taking steps to gradually reopen their economies after crippling lockdowns triggered by the virus.

In the U.S., a determined President Donald Trump said in an interview: “It’s possible there will be some deaths because you won’t be locked into an apartment or a house or whatever it is.”

“We can’t keep our country closed. We have to open our country,” he added. “There’ll be more death… the virus will pass, with or without a vaccine… and we are going to be back to normal.”

Oil market participants are looking hopefully at a reversal of the dynamics that crushed crude prices over the last couple of months: demand plunged faster than supplies could be cut. Now, production is getting cut faster than expected while demand could make a comeback sooner than thought.

According to the Energy Information Administration, crude oil production in the United States fell to 12.1 million barrels per day for the week ended April 24 versus 13.1 million barrels per day at its high point.

“Demand devastation is fully priced in and the oversupply concerns are slowly easing,” said Edward Moya, senior market analyst at Oanda. “Oil prices appear to be taking the staircase up and that will continue as expectations for fuel demand to pickup improve.”

API data shows inventory build, but crude prices didn’t bat an eyelid

Tuesday’s data from the API estimated a buildup in crude oil inventories of 8.440 million barrels, against an expected 7.1 million barrels for the week ended on May 1.

The higher inventory did not affect the bullishness in the oil price during the trading session.

It appears that the market is looking forward to Americans stepping out and driving again, thereby shoring up demand for gasoline. According to CNBC, tankers positioned off the West Coast have started unloading crude for processing at California refineries, a sign that these units may be reopening for business. This augurs well for a demand pickup in ensuing weeks.

UBS optimistic on the demand outlook

According to UBS analysts, a combination of factors could result in a rebalancing of the oil market. These include relaxations of lockdowns, easing travel restrictions, subdued production and spending cuts by oil and gas producers.

“We therefore expect the oil market to be balanced in third quarter and undersupplied in fourth quarter, and Brent to recover to $43 per barrel by end-2020 and to $55 per barrel by mid-2021,” the UBS analysts wrote on Tuesday.

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