Oil Above $30 For First Time In Two Months On Massive Production Cuts Chatter
Oil futures traded above $30 per barrel on Monday (May 18) for the first time in two months, as the perception of huge production cuts supported prices in a marked contrast to the dire sentiment seen in April, according to Forbes.com.
The West Texas Intermediate (WTI) June contract, set to expire on May 19, traded up 7.10% or $2.09 at $31.52 per barrel at 6:02am EDT, having fallen into negative prices at the same juncture on April 20, ahead of last month’s expiry date.
Concurrently, the Brent July contract traded 5.38% or $1.75 higher at $34.25 per barrel, as production cuts in the U.S. and OPEC+ pledges of 9.7 million barrels per day (bpd) in output reductions helped create the perception of a market on its way towards rebalancing.
The number of U.S. drilling rigs recorded by Baker Hughes BHI fell for a ninth week to levels that have not seen in over a decade. The speed of pledged and executed American cutbacks, thought to be over 1.2 million bpd based on public declarations and data for May and June, have also taken the market by surprise.
These reductions come on top of OPEC+ cuts which took effect on May 1, with many participants including Saudi Arabia, Kuwait and the United Arab Emirates pledging to go above and beyond their promised reduction levels.
Meanwhile, OPEC’s second-biggest producer Iraq said it plans to halt output from Al-Ahdab oilfield due to protests that are hampering operations, according to Reuters.
If reflected in survey data, these developments and production declines could result in the removal of just over 10% of global production prior to March 6 – the date of the short-lived collapse of OPEC+ talks.
The appearance of tangible cuts and perception of more pronounced ones to follow have removed intense pressure on a market that was confronting a glut in April. Trends currently suggests, prices are unlikely to drop below $20 per barrel, let alone hit a negative patch akin to April in the absence of a second wave of the coronavirus or Covid-19 pandemic – initial cause of the oil price crash – resurfacing.
Of course, macroeconomic risks persist with major European economies headed by Germany are staring at a recession while an uncertain U.S. economic recovery could stretch through the end of next year. For now, there is ample positivity.
Rystad Energy’s Senior Oil Markets Analyst Paola Rodriguez Masiu says cautious optimism on the demand side of the oil equation has also helped prices, with gasoline demand coming back as governments ease confinement measures.
“While this will help, the physical market is not completely out of the woods. We still see a 13.7 million bpd implied liquids (crude, condensate, NGLs, others) stock builds in May. Although significantly down from the all-time-high 26.7 million bpd implied builds in April, the market will need to absorb crude into storage both onshore and at sea.”
And let’s not forget, any Covid-19 resurgence aside, there is always a risk that OPEC+ compliance with production cuts might falter as oil prices recover.
