Oil Gains Ground Despite Worries About Trade War Between U.S. And China

Oil Video 04.05.20.

Oil Continues Its Recent Upside Trend

Oil traders are tired from never-ending downside and send oil higher on the day the world is worried about the potential new stage in the trade war between the two biggest economies.

Any additional tariffs or sanctions on China will certainly lead to less oil consumption but the market ignores this risk for now as traders bet that the worse is already behind.

It is also possible that the negative effects from the rebalancing of the United States Oil Fund are now over (the fund decided to get exposure to contracts starting from July 2020, creating pressure on front-month June 2020 contracts), and WTI oil is free to increase in price.

Meanwhile, the global oil benchmark Brent is also experiencing upside, so the move is broad-based. I’d note that the spread between the front-month contract and longer-dated contracts in both WTI and Brent narrows so we can see that the market calms down a bit.

Nevertheless, oil traders do not have too much optimism about the ultimate market rebound as WTI December 2020 contracts trade below $30 while Brent December 2020 contracts trade below $33.

U.S. Rig Count Falls At A Fast Pace

Baker Hughes has recently provided its weekly U.S. rig count which showed that the total number of drilling rigs active in the U.S. declined by 57 to a total of 408. The number of drilling rigs is falling for six weeks in a row due to the impact of low oil prices.

Compared to the rig count dated May 3, 2019, the U.S. has lost 582 active drilling rigs. The decline in the rig count will inevitably lead to a decrease in domestic oil production.

The latest EIA Petroleum Status Report showed that domestic oil production has declined to 12.1 million barrels per day (bpd), and I expect that we’ll soon see it dropping below the 12 million bpd mark.

Potential problems with oil storage have recently pushed WTI May 2020 contract into the negative territory just before its expiry, so any news that promise a better supply/demand balance in the U.S. are bullish for oil.

However, it remains to be seen how the real-life oil storage situation will look like in the near term as it is unclear how fast the U.S. will reopen its economy. As I wrote on Friday, it is next to impossible to forecast the actual hit to oil demand right now so traders will have to watch production data and storage levels to evaluate the situation in the physical oil market.