Oil prices rose again this morning as the promised production cuts seem to be realized and on signs that demand is indeed picking up globally. Rystad Energy's Senior Oil Markets Analyst Paola Rodriguez Masiu said the improving global demand and declining supply has contributed to the oil price rise on Tuesday. Rodriguez Masiu said, "There are two main forces behind a stronger oil price, the declining supply and the improving demand. Today the market sees both forces aligning, the cuts OPEC+ promised are materializing and other non-member production shut-downs are also really helping to limit the oversupply. Meanwhile lockdown measures are removed globally and the economy needs fuel to restart." Rodriguez Masiu added that the biggest gains were seen by WTI. "WTI especially, which was the contract most depressed last month, is now seeing the biggest gains, only a couple of dollars lower than Brent. That is closely related to the US economy as lockdown measures are being removed or are about to be removed in most states, while storage builds fell last week. "Both signs are that a recovery is under way. That said, the reason that onshore stocks did not increase last week is that floating storage came to the rescue, not that much that suddenly the market was not oversupplied." When asked whether the current mid-30 dollar levels are sustainable, Rodriguez Masiu said, oil prices made history last month when the WTI May contract took a deep dive into the negative territory. On April 20, just one day before the expiration day of the contract May traders were still waiting "for a good time to sell," but when time ran out and they realized that taking the physical settlement was not possible due to limited storage availability at Cushing, Oklahoma, the result was a "race to the bottom" as traders frantically sought to get rid of their contracts. Market participants were painfully lethargic assessing the storage situation at Cushing and the magnitude of the oversupply at the time. Unfortunately for them, the market does not indulge slow learners, -40 $/bbl was the price for failing to acknowledge the "elephant in the room". "We find that this time around, trading has been a lot more cautious this month, making the prospect of sharp negative prices unlikely. The volumes of contracts that investors hold as the June contract approaches maturity has significantly shrunk from the equivalent last month. People don't easily forget the hard-learned lessons, it seems," Rodriguez Masiu said. "Apart from the significant reduction in volumes held for the June WTI contract, as traders rolled out their positions into other future contracts more smoothly this time around, the fundamentals have also improved. Chinese crude demand is almost back to pre-pandemic levels and Indian fuel consumption is seeing an increase. Both suggest that the worst might indeed be behind us and that are prices are stabilizing if not increasing further," Rodriguez Masiu added. "The price boost did not come without sacrifices though. Shut-ins have been painful for many producers, especially in the US and Canada. The production cuts that OPEC+ agreed, with some Middle Eastern producers expanding them, were unprecedented and generous. The market did mobilize to save itself, it did what needed to be done, not an easy choice by any account," Rodriguez Masiu said. — Rystad Energy
