Oil Prices Rebound in Recent Trading, But Is the Trend Sustainable?

RIO DE JANEIRO, BRAZIL – After the chaos of crude oil in recent weeks, with futures contracts coming in at negative prices, the commodity is now experiencing a moment of relief as analysts try to understand the new global demand scenario.

On Monday, May 11th, Saudi Arabia announced it will further reduce its production in an effort to support the commodity’s market price. As of June 1st, the kingdom will reduce production by one million barrels of oil per day (bpd); coupled with cuts agreed by OPEC+, this measure brings Saudi Arabia’s total cut to around 4.8 million bpd compared to April.

With the news, West Texas Intermediate (WTI) oil, a benchmark in the US market, rose more than one percent, but then lost ground again, closing down 2.43 percent at US$24.14 (R$145) a barrel. The Brent type barrel, on the other hand, suffered a stronger retreat, of 4.4 percent, at US$29.60.

Despite the decline in the session, it cannot match the days of real market panic, when the price of oil dropped by double-digit percentages, in addition to coming after a string of commodity gains amid production cuts in several countries (as well as in the US) and the prospect of a gradual economic rebound.

Saudi Arabia also stated it would reduce May production “in line with its customers”. “The Kingdom aims, through this additional cut, to encourage OPEC+ participants, as well as other producing countries, to comply with the production cuts to which they have committed and provide additional voluntary cuts in an effort to support the stability of global oil markets,” said a statement from the Saudi press agency.

This new production cut adds to last week’s positive news when WTI oil soared 25 percent in five trading sessions after the Saudis also decided to raise oil prices for customers around the world as demand picks up.

According to Bloomberg, Saudi Aramco raised the official selling price for its flagship Arab Light for customers in Asia by US$1.40 per barrel, resulting in a US$5.90 discount from the Middle East benchmark. The oil company was expected to reduce the official price by US$2.50 per barrel to a discount of US$9.80, according to news agency estimates with seven operators and refineries.

This decision by the Saudis suggests a new stage after the shock of recent months, pointing to a potential improvement in demand as the world’s largest consumer market, Asia, starts to rebound and reopen local economies in the face of the novel coronavirus outbreak.

As China and some European countries are trying to get back into business, demand for gasoline has also shown an improvement, suggesting that in this early recovery, people should use their cars more.

With the relaxation of confinement measures and the reopening of economies in parts of the world, driving emerges as the preferred means of social distancing and provides some short term relief to the oil market.

“People are using their cars more because they are afraid to use public transportation,” said Patrick Pouyanne, CEO of French oil giant Total, to Bloomberg.

On the streets of Beijing, Shanghai, and Guangzhou, morning traffic is now greater than the 2019 average, while subway use is well below standard, according to data compiled by BloombergNEF.

Traffic on the Beijing subway system is 53 percent below pre-virus levels. Subway use in Shanghai and Guangzhou is 29 and 39 percent below normal, respectively.

In this upswing scenario, oil inventories in China have also started to decline in recent weeks, according to analysts consulted by Bloomberg and satellite data. Inventories are starting to decline as refineries speed up operations to meet the growing demand from the out-of-confinement economy.

According to Morgan Stanley, inventories at the world’s largest importer are tentative indicators that the global oil market is starting to rebalance after demand collapsed. Inventories declined, despite April’s higher oil imports compared to the previous month, according to Customs figures.

Has the time come for oil to rebound?

Faced with this improved scenario, despite the uncertainties over the consistency of the rebound in demand, the Ágora Investments team, led by analyst Vicente Falanga, believes that “the stream of news about oil should become increasingly positive, with the easing of quarantine and more news of forced cuts in production (as stocks reach their limit)”.

“As global oil product/oil inventories peak in May/June, we believe that oil producers will need to force shutdowns, thereby expediting the rebalancing of global markets,” the analyst said.

According to him, global oil storage capacity, considering inventories, emergency stocks, and tankers, is about nine billion barrels, and by the end of April some 85 percent of this capacity was filled, a situation that could worsen by June.

“Although creative storage methods may emerge, the current considerable imbalance of supply and demand should inevitably cause the world to reach its stock limit soon,” Ágora says, considering that as a result, the news should improve in the near future.

Consequently, the brokerage house increased its projections for Brent oil from US$40 to US$45 per barrel in 2021, and from US$45 to US$55 in 2022. In the wake of this more optimistic view, analysts also raised the recommendation for Petrobras’ shares (PETR3; PETR4) from neutral to purchase.

On the other hand, XP Investments noted in a statement last week that, despite recent news confirming optimism regarding oil prices, greater clarity regarding the resumption of activity around the world may be required to confirm the commodity’s rebound in demand.

“When this trend is confirmed, we expect a rebound in global oil markets, also grounded in the closure of producing wells and reduced investment by global oil companies,” he said.

Therefore, for the time being, the environment remains cautious for the commodity, as can be observed in this Monday’s session, with oil recording a decline despite the cut in Saudi production.

Prices are well below their highs and the road to recovery is far from certain, with the commodity posting a drop amid fears of a potential second wave of coronavirus cases, after countries that thought they had overcome the worst phase, which includes South Korea, reported a surge in infections.

Source: InfoMoney