Crude Oil

Oil Rallies On Hopes That Oil Demand Will Start To Rebound

Oil Video 05.05.20.

First Signs Of Increased Energy Usage Push Oil Higher

Oil traders are betting on the increase in oil demand as global economies start to reopen, and oil continues its massive rally from recent lows. The upside is most visible in the front-month June 2020 contract, but longer-dated contracts show very healthy gains as well.

The market completely ignored the failure of the Texas Railroad Commission to  vote on the proposed cuts of 1 million barrels per day (bpd) as it believed that such cuts would occur naturally.

The mandated cuts proposal was backed by some shale oil companies but opposed by oil majors like Exxon Mobil and Chevron who have more resources to deal with the current crisis.

Potentially, oil majors wait for the acute phase of the crisis at smaller independent firms to scoop up their assets at cheap prices.

Anyway, U.S. oil production will continue to decline despite the recent upside in the oil market because prices stay at very low levels. The front-month contract is trading above $24 per barrel, while the December 2020 contract is valued at $31 per barrel.

These levels are well below the breakeven levels of many oil wells so production is set to decline naturally.

Inventory Reports Will Test The Recent Upside Move

The recent upside move will soon be tested as API Crude Oil Stock Change will be reported today after the U.S. stock market close while EIA will publish its Crude Oil Stocks Change tomorrow.

The current analyst consensus calls for an 8.125 million increase in crude oil stocks. The other important part of the EIA Weekly Petroleum Status Report is the information on domestic oil production.

Last week, production totaled 12.1 million bpd, and the upcoming report will likely show that it fell below 12 million bpd.

A decrease in domestic oil production is very important to improve the supply/demand balance and reduce the weekly inventory build as some major components of oil demand like air traffic are not coming back anytime soon due to fears about the second coronavirus wave.

The speed of the oil demand rebound is very hard to determine so traders should expect elevated oil price volatility in the upcoming weeks.