Oil Gains Ground On Hopes For A Robust Recovery

Oil Video 26.05.20.

Russia Believes That Current Oil Surplus Is 7 – 12 Million Barrels Per Day

Oil continues its upside move helped by global market optimism, although it faces increased pressure as inventory levels stay elevated.

Russian Energy Minister Alexander Novak has recently stated that the current market surplus was 7 – 12 million barrels per day (bpd). He believes that supply has declined by 14 – 15 million bpd, and that the market should reach balance in June or July.

The OPEC+ deal delivered a production cut of 9.7 million bpd. An additional cut of about 4 million bpd is spread among non-OPEC+ countries, according to the Russian Energy Ministry.

Now that the production cuts are implemented, further trajectory of oil prices depends on the pace at which demand returns.

In China, demand is expected to get to 92% of prior-year level in May. In India, which continues to lift virus containment measures despite the increase in the number of coronavirus cases, demand is expected to get a major boost in June as Indian citizens switch to small vehicles in order to avoid using public transport.

IEA Thinks That We Haven’t Seen Peak Oil Demand Yet

International Energy Agency stated that the world has not yet reached peak oil demand. According to IEA, economic recovery and low oil prices will support oil demand and push it to previous levels.

Before the coronavirus hit the world economy, global oil demand was near 100 million bpd. Demand took a huge hit in April, when it collapsed by about 30 million bpd, but started to recover as countries lifted virus containment measures.

While cars return to the streets as economies continue to reopen, global oil demand is still under material pressure as economic activity remains constrained while the world air travel is almost halted.

Another problem for oil is the size of oil inventories which may put pressure on prices for months to come unless producers continue to implement robust production cuts and eliminate excessive inventories.

In this light, it’s not surprising to see that the spread between the front-month July 2020 contract and the December 2020 contract is small. While the July 2020 contract trades near $34, the December 2020 contract has settled below the $36 level, suggesting that traders do not believe that oil market will solve its current problems by the end of this year.

For a look at all of today’s economic events, check out our economic calendar.