Aditya RajIn April, when oil prices crashed below negative for the first time, no one would have expected to see WTI climb all the way to $30 a barrel-mark in just a month. In all likelihood, WTI’s seemingly easy climb to the current price tag has been made possible due to the easing lockdown restrictions across the globe. However, analysts and market experts are still contemplating if the rally is an early sign of an oil price rebound or the characteristic of a downward spiral.
In this article, let us understand how the April zero dollar touchdown could be a sign of an imminent oil price rebound.
The How of Oil Price Rebound
In order to understand why oil price rebound has become a possibility, it is important to list down the major forces that pushed them off the cliff in the first place.
- Extreme geopolitical tensions
- Saudi-Russian Oil Price war
- OPEC internal dispute
- Crude oversupply
- Strong US Dollar
- Economic crisis (this time induced by the coronavirus pandemic)
In the period following the zero dollar oil touchdown (April through May), some of these factors slowly disappeared from the canvas providing the upward thrust required for an oil price rebound. While Saudi Arabia and Russia mended their relations, USD’s strength declined, and OPEC’s unanimous decision on production cuts started bearing fruits as the markets began feeling a supply crunch. However, the overall sentiment weighed heavily towards a bullish crude market only after the Governments around the world started easing down the restrictions.
In a client note, RBC analyst Michael Tran said,
The reopening of economies has injected a degree of cautious optimism back into an oil market that plunged to historic lows only weeks ago.
A Reuters survey revealed that the 13-member cartel of oil-producing nations, OPEC pumped, on average, 24.77 million bpd in May, a decline of 5.91 million bpd from April. Daniel Gerber, Chief Executive of Petro-Logistics told Reuters, “OPEC has made a strong start in May with its latest production cut, lowering supply by 5 million bpd versus April”.
As the restrictions ease and movement around the world, optimistic sentiments are all set to surround the market with oil prices gaining from a slow upswing in demand.
Easing Lockdown Restrictions: Boon for Oil Markets?
The number of COVID-19 cases has surged past 6 million across the world, with the US, Brazil, and Russia topping the charts. Despite the exponential rise in the infections, the governments around the world have now started to ease the restrictions in a phased manner, in a bid to revive the sluggish global economy. However, it must be noted that if easing the restrictions, in any manner, ramps up the COVID-19 infection, it won’t be long before the oil market goes for another downward spiral.
Another interesting point to note here is the vulnerability that might arise due to the lacklusterness of Iraq and Nigeria towards the agreed-upon production cut. A Reuters survey showed that while Iraq’s compliance with the cartel’s production quota was only 38%, Nigeria could fulfill only 19% of its promised reduction.
Despite the fragile situation of the market, all dynamics are indicating an imminent oil price rebound, and with the economies around the world opening up, there couldn’t be better timing. Let’s just hope that the market holds up in these tough times.
(The views and opinions expressed in this article do not necessarily reflect the views of Energy Dais.)
As inflationary pressures on food increase I feel you will not see a big bounce. People are just not traveling as far.
Thank you for your comment, Stephen. I can agree that increasing inflationary pressure on food could hamper the uphill journey of oil prices, but if OPEC++ remains committed to the production cuts, and restrictions on movement around the world eases, oil prices will recover faster than it did during the last crisis. Especially if big crude importers like China and India let loose the constraints on the population. Regardless, things will remain in subcritical condition, and crude markets are in for a ride until Sep-Nov 2020.