Oil Rallies As The World Economy Continues To Reopen

Oil Video 18.05.20.

Encouraging News On The Coronavirus Vaccine Front And Optimism About The Economic Recovery Boost Oil Prices

Oil prices enjoy major upside ahead of WTI June 2020 contract expiry. Trading has shifted to the July 2020 contract, and the spread between the front-month contract and the longer-dated contracts has decreased.

There are several reasons for this optimism. The world economy continues to reopen, and countries start to lift their virus containment measures which is especially important ahead of the summer driving season.

Also, the news about a potential COVID-19 vaccine provide hope that the world will get out of the current situation without experiencing a second wave of the virus.

In addition, the previously announced production cuts are improving the supply/demand balance. The OPEC+ deal has clearly provided the much-needed support for the oil market while cuts from other producers have also played their important role.

I’d note that the market is not too optimistic in its evaluation of the future perspectives for oil prices as the actively traded December 2020 contract is trading near $34.00 per barrel.

This means that traders are cautious about the speed at which demand will recover and the inventory overhang which may put pressure on oil prices for months to come.

U.S. Domestic Production Is Set To Fall Further

Oil traders will continue to watch the oil inventory levels closely as they provide important data about the state of the supply/demand balance.

The recent Baker Hughes rig count showed that the total number of active drilling rigs in the U.S. declined by 35 to 339 while the number of rigs drilling for oil decreased by 34 to a total of 258.

The strong downside trend in the number of rigs drilling for oil in the U.S. signals that domestic production will continue to decline.

The latest EIA Weekly Petroleum Status Report showed that domestic production declined from 11.9 million barrels per day (bpd) to 11.6 million bpd, a 300,000 bpd drop in just a week.

As the rig count continues to decline, the only question is the magnitude of the drop in the U.S. oil production. A decrease in U.S. production should ultimately lead to a decrease in U.S. oil inventories, which are the biggest obstacle on WTI oil’s way to higher levels.